The BoC, i.e., Bank of Canada has raised interest rates to the highest since 2001.  The overnight lending rate is presently 4.75%, i.e., 25 basis points higher than the previous increase this January. The Bank of Canada began raising rates in July 2022, when it went from over 1.5% to 2.5%. This implies that over the span of one year, the rate increased by 3.25% points. 

In addition, the current hike surprises many as the Bank of Canada’s Governor Tiff Macklem had said previously that the bank would try to avoid any further increases. 

The BoC, i.e., Bank Of Canada, expected that the previous increase would reduce consumer spending to the point where the economy could slow & get stabilized. However, it further states that there have been unexpected increases in expenditures for interest-sensitive goods, like the housing market. 

Moreover, it also says that the labor market remains tight. As a result, the immigration & participation rates have expanded the supply & demand of workers. This implies that there continues to be a high demand in the economy of Canada. 

The Bank of Canada has maintained a high-interest rate in recent months in order to slow consumer spending & reduce the inflation level, which presently is 4.4%. Theoretically, less spending implies less demand for products & services. Thus, businesses do not need to work as hard to meet the needs & demands of the consumers or lower the prices of their products. 

 

The Bank Of Canada: What Is It? 

The BoC, i.e., Bank of Canada, was established as Canada’s central bank in the year 1934. Moreover, it became a crown corporation in 1938. The federal government owns this bank, but it operates mainly independently. 

Coming to the role of the Bank Of Canada, the Bank of Canada Act asserts that the bank’s primary purpose is to regulate credit & currency in the best interests of the nation’s economic life. In addition, it is responsible for setting interest rates & making policies that will have an optimistic impact on the nation’s economy. 

 

Further discussing the role of the Bank of Canada, it has the following areas of responsibilities:

  • Monetary Policy

The Bank Of Canada influences the supply of money circulating in the economy, using the monetary policy framework to stabilize inflation. 

  • Financial System

In order to promote safe, efficient, & sound financial systems in Canada & internationally, numerous transactions take place in the financial markets. 

  • Funds Management

It is the ‘fiscal agent’ for the Canadian government, thus managing its foreign exchange reserves as well as public debt programs.

  • Currency

The bank designs, issues, & distributes the bank notes. 

 

While the federal government owns the bank, its website highlights a few ways wherein they both are separate: 

  • The Bank’s Board of Directors appoints the Governor as well as the Senior Deputy Governor. 
  • The Deputy Minister of Finance is above the Board of Directors but has no vote. 
  • The Bank of Canada expenses are submitted to the Board of Directors. In contrast, the federal government department presents its expenses to the treasury board. 
  • The bank regulates its employees instead of federal public service agencies.
  • External auditors audit the books of the Bank of Canada. The Cabinet appoints these auditors upon the suggestion of the Ministry of Finance.

 

The BoC asserts that by being independent of the political process, it can adopt a medium as well as a long-term perspective, which is vital for conducting effective monetary policy. 

Still, according to the BoC Act, when the bank or the government disagrees on monetary policy, the Minister of Finance offers a written directive upon consulting the Governor. In addition, the directive must include specific terms & conditions and be applicable for a certain period. Moreover, the bank must comply with it!    

 

Role Of Bank Of Canada: How High-Interest Rates Impact Newcomers? 

Higher interest rates imply that borrowing money from Canadian banks to make significant purchases, like a mortgage or buying a car, is more expensive. 

Making mortgages more expensive can further make it challenging for newcomers in Canada to buy a home. As a result, many newcomers will rent their houses instead of purchasing them. However, this can also be expensive. For instance, the current average rental price of a one-bedroom apartment in Toronto is $2,425 monthly. 

Canada’s tight labor market is also creating demand for skilled professionals. According to the Immigration Levels Plan, Canada will welcome over 500,000 immigrants by 2023. The number is relatively high because numerous employment sectors are dealing with an acute shortage of skilled workers.  

Therefore, in order to help the nation reach its immigration targets, IRCC will be holding new category-based selection draws later this summer for Express Entry applicants with work experience in certain high-demand occupations. 

Still, more people can lead to more spending & demand for products, housing, & services, thus making it more difficult to reduce interest rates. It is not known how the Bank of Canada will move forward