Canada – Monetary & Fiscal Policy.

The Bank of Canada (BOC) is the main governing body when it comes to determining the country’s monetary policy.

Decisions on the monetary policy are made by the Governing Council, which is made up of the bank’s governor, the senior deputy, and four other deputy governors.

Unlike most other central banks, the BOC doesn’t have a set time to make changes to its policies.

The council meets every single working day and can alter monetary policy to their liking at any time.

The bank’s basic mandate is similar to other central banks in that they aim to make sure that the Canadian dollar’s value is stable and that the country’s inflation rate is within its 1-3% target.

The BOC does this through open market operations and constant adjustment of the bank rate.

The BOC implements its open market operations by using a method called the Large Value Transfer System (LVTS).

The LVTS enables commercial banks all over Canada to borrow and lend money to each other so that they could go about their daily operations.

Now, the interest rate charged on these transactions is called the bank rate.

By altering the bank rate, the BOC can basically control the flow of money in the economy.

Example

To illustrate this, let’s say the bank rate is set at 2.00%.

In one of its meetings, the BOC realizes that the CAD is losing value much faster than expected, which is causing businesses to increase the prices of goods they sell and the services they offer.

The BOC then decides to raise the bank rate to 2.50%.

By hiking the bank rate, the interest needed to be paid to lenders increases, in turn, reduces the likelihood of banks, businesses, and consumers taking additional debt.

Now, since there is less money in the pockets of consumers, the chance of their spending is decreased, preventing any further inflation.

What business in their right mind would increase prices when nobody is buying, right?

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