Frequently Asked Questions
We provide answers to frequently asked questions on the following topics:
We provide answers to frequently asked questions on the following topics:
The Board of Directors must ensure that the Bank is managed competently. The Board is responsible for reviewing the Bank's general policies on matters other than monetary policy and for approving the Bank's corporate objectives, plans and annual budget. The Board of Directors includes the Governor, the Senior Deputy Governor, twelve outside directors and the Deputy Minister of Finance (who has no vote). Monetary policy is neither formulated nor implemented by the outside directors. In this area, the directors' job is to keep the Bank informed about prevailing economic conditions in their respective regions.
The directors are also responsible for appointing the Governor and Senior Deputy Governor.
The Governor is appointed for a fixed term of seven years.
If a profound disagreement on the conduct of monetary policy were to occur, the Minister of Finance, with the Cabinet's authorization, can issue a written directive to the Governor specifying a change in policy. No directive has ever been issued.
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.
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.
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 institutions have with us.
Under normal conditions, the Bank changes the Target for the Overnight Rate, the operating band, and the Bank Rate at the same time, and by the same amount (the diagram below shows how they relate to each other). Note, however, that when the Bank sets the target for the overnight rate at its lowest possible level of 0.25 per cent - the effective lower bound - the band is only one-quarter of a percentage point wide (0.25 to 0.50 per cent). In this case, the Target for the Overnight Rate is the bottom of the band, rather than the midpoint, and is the same as the deposit rate (0.25 per cent).
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.
Related information
Fact Sheets:
Quantitative easing is the purchase by a central bank of financial assets through creation of central bank reserves. As a result, the price of the purchased assets (which can include government securities or private assets) rises and the yield on the assets falls. The expansion of reserves available to commercial banks also encourages them to increase the supply of credit to households and businesses.
In economic terminology, quantitative easing uses 'unsterilized' funding; in other words, the reserves of the central bank are increased to finance asset purchases.
Credit easing is the targeted purchase by a central bank of private sector assets in certain credit markets which are important to the functioning of the financial system. The goal of credit easing is to reduce risk premiums and improve liquidity and trading activity in specific markets so that credit will flow and demand in the economy will expand.
Credit easing can be done on a 'sterilized' basis; in other words, there is no need to increase central bank reserves in order to undertake credit easing. If undertaken on an unsterilized basis, this amounts to combining credit easing with quantitative easing.
No. The Bank of Canada is not a commercial institution. It does not provide regular banking services, nor does it accept deposits from the general public. Its clientele are the federal government, other central banks, commercial banks and certain other financial institutions.
For information on commercial banks in Canada, see the Canadian Bankers Association.
The Bank of Canada was created to be the sole issuer of bank notes and to facilitate management of the country's financial system.
Having an independent monetary institution allows for the separation of the power to spend money from the power to create money.
Separating the central bank from the political process enables it to adopt the medium- and long-term perspectives essential to conducting effective monetary policy.
The Bank of Canada is responsible for:
The revenues generated by the Bank each year greatly exceed its operating expenses.
The revenues derive from the Bank of Canada's role as the issuer of bank notes to Canada's financial institutions. Institutions pay the Bank when they withdraw bank notes from it. The Bank then invests these funds in government bonds and treasury bills. The interest earned on these investments is the Bank's main source of revenue.
The difference between the interest the Bank earns and its operating expenses is its net profit, which is given to the federal government. In recent years this profit has averaged about $1.7 billion annually.
This process, whereby a central bank earns revenue in exchange for its role as the issuer of a country's currency, is called seigniorage.