The inflation-control target — one of the two cornerstones of Canada's monetary policy — is set jointly by the Bank and federal government. However, the day-to-day administration of monetary policy is the responsibility of the Bank's Governing Council, composed of the Governor, Senior Deputy Governor, and Deputy Governors.
The Bank of Canada Act requires regular consultations between the Governor and the Minister of Finance on the direction of monetary policy. If a profound disagreement were to occur between the Bank and the government, the Minister of Finance could issue a written directive to the Governor specifying a change in policy. This would most likely result in the Governor's resignation. However, such a directive has never been issued.
The Bank implements monetary policy by influencing short-term interest rates. It does this by raising and lowering the target for the overnight rate (also known as the key policy rate.) This is the interest rate at which major financial institutions borrow and lend one-day (or overnight) funds among themselves.See How Monetary Policy Works for a detailed explanation of the process.
Monetary policy refers to the measures taken by the Bank of Canada to influence the economy by regulating the amount of money in circulation.
Fiscal policy (budgetary policy) refers to the measures taken by the government to increase or decrease public spending and taxes.
Because doing so would reduce the value of our money, raise interest rates, and undermine the growth of the economy — the exact opposite of our goals.
If the Bank were to print money to repay the national debt or to finance government programs, it would be adding greatly to the amount of money in circulation. This would encourage people to spend and borrow more, and the economy would receive a temporary boost. But overall demand for goods and services would grow faster than the economy's ability to produce, and this would inevitably lead to higher inflation.
No. Financial institutions set their own prime rates based on the cost of short-term funds, and on competitive pressures among them. The Bank influences the cost of short-term funds by setting the target for the overnight rate.
The Bank Rate is the rate at which the Bank of Canada lends funds to financial institutions. It is set at 0.25 per cent above the target for the overnight rate, which is the Bank's key policy rate (see below.)
The target for the overnight rate is the average interest rate that the Bank wants to see in the marketplace for one-day (or "overnight") loans between financial institutions. Changes in this rate influence other interest rates, such as those for consumer loans and mortgages.
The Bank has refined the way it conducts monetary policy over the years. In 1994, it established an operating band for the overnight rate, and in 1996 it changed the way it sets the Bank Rate.
The Bank Rate is now set at the top of the operating band. It is always one-quarter of a percentage point above the target for the overnight rate, which is at the middle of the band. The Bank Rate is also the rate at which the Bank will lend money overnight to the financial institutions that take part in Canada's most important payments system, the Large Value Transfer System.
The bottom of the operating band is the interest rate the Bank pays on deposits that financial insitutions have with us.
The Bank always changes the target for the overnight rate, the operating band, and the Bank Rate at the same time, and by the same amount (see diagram below.)
The target is the appropriate rate to use when comparing the levels of interest rates with those of other countries. It corresponds directly to the U.S. Federal Reserve's "target for the federal funds rate," the Bank of England's two-week "repo rate," and the minimum bid rate for refinancing operations (the repo rate) at the European Central Bank.