Recently, The Bank of Canada implemented its highest rate of interest of 4.75%.This 25 basis points rise from the previous increase in January has surprised many, as BoC Governor Tiff Macklem had previously indicated an intention to avoid further hikes.
The rate of interest escalated by 3.25% since July 2022.This unexpected rate hike comes in light of the BoC’s anticipation that previous increases would reduce consumer spending, thereby stabilizing the economy. However, the BoC has observed unforeseen rises in spending on interest-sensitive goods, including the housing market. Additionally, the labor market remains tight, and the influx of immigrants and increased participation rates have expanded the supply of workers who are being swiftly hired. Consequently, Canada’s economy continues to face high demand.
To curb consumer spending and mitigate inflation, which currently stands at 4.4%, the BoC has maintained a high-interest rate in recent months. In theory, reduced spending implies decreased demand for products and services, enabling businesses to lower prices and meet consumer needs more effortlessly.
Established as Canada’s central bank in 1934 and later becoming a crown corporation in 1938, the Bank of Canada operates as a predominantly independent entity while being government-owned. The increase in the rate of interest is initiated to regulate the economic growth of the country. The BoC is entrusted with setting interest rates and formulating policies aimed at positively impacting Canada’s economy.
The Bank of Canada Assumes Four Key Responsibilities:
Monetary Policy
Through its monetary policy framework, the BoC influences the supply of money in Canada’s economy, aiming to maintain low and stable inflation.
Financial System
The BoC strives to promote safe, sound, and efficient financial systems within Canada and internationally. It also conducts transactions in financial markets to support these objectives.
Currency
Designing, issuing, and distributing Canada’s banknotes falls under the purview of the BoC.
Funds Management
As the fiscal agent for the Government of Canada, the BoC manages public debt programs and foreign exchange reserves.
While the federal government owns the BoC, there are distinct separations between the two entities. Bank of Canada’s board of directors appoints the Governor and Senior Deputy Governor, however, the Deputy Minister of Finance sits on the Board of Directors but with no voting rights.Additionally, the BoC’s expenditures are reviewed by its Board of Directors, unlike federal government departments. Furthermore, BoC employees are regulated by the Bank, not federal public service agencies. On the recommendation of the Minister of Finance, external auditors appointed by Cabinet audit the BoC’s books, as opposed to the Auditor General of Canada.
The BoC asserts that its independence from the political process allows for the adoption of medium- and long-term perspectives, which are vital for effective monetary policy. However, in case of disagreement between the BoC and the federal government, the Minister of Finance, in consultation with the Governor may issue a written directive. The directive must contain specific terms and be applicable for a defined period, and the BoC is obligated to comply.
The impact of high-interest rates on newcomers is significant. Higher rates translate to increased borrowing costs for newcomers seeking large purchases like homes or cars from Canadian banks. Consequently, it becomes challenging for newcomers to afford homeownership, often resulting in a higher number of individuals resorting to renting.
Canada’s tight labor market presents opportunities for skilled newcomers. The Immigration Levels Plan aims to welcome 500,000 new permanent residents each year by 2025, partly to address the shortages of skilled workers in various employment sectors. To achieve immigration targets and fill these gaps, Immigration, Refugees, and Citizenship Canada (IRCC) is expected to introduce new category-based selection draws this summer for Express Entry candidates with work experience in high-demand occupations.
However, the influx of more people into the country leads to increased spending and demand for goods, services, and housing, potentially complicating efforts to lower interest rates. The BoC’s strategy moving forward remains uncertain. The Bank of Canada plays a crucial role in shaping Canada’s economic landscape. Its recent interest rate hikes have implications for both newcomers and the broader economy, affecting borrowing costs and the affordability of homes. Understanding the BoC’s responsibilities and its relationship with the government provides valuable insights into the mechanisms influencing Canada’s monetary policies.
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