Bank of Canada

The Bank of Canada, formed in 1935, is Canada’s central bank. It manages the Canadian economy by controlling the money supply and regulating certain aspects of chartered bank operations.

How It Appears Per Course

ADMN 201

Governance

• Managed by a board composed of a governor, a deputy governor, and 12 directors appointed from different regions
• Not a commercial bank — does not take deposits from the public or make personal loans

Bank Rate (Rediscount Rate) The bank rate is the rate at which chartered banks can borrow from the Bank of Canada. It is the key benchmark that influences the chartered banks’ prime interest rates.

In practice, chartered banks seldom actually borrow from the Bank of Canada — but the bank rate signals the direction of monetary policy, anchoring all other interest rates in the economy.

Overnight rate chain:

Bank of Canada overnight rate ↑ → chartered bank borrowing costs ↑ → consumer and business lending rates ↑ → spending and borrowing ↓ → inflation ↓

Monetary Policy Tools

The Bank of Canada uses two primary tools:

Tool	Expansionary (↑ money supply)	Restrictive (↓ money supply)
Open market operations	BUY government securities → increases bank reserves → more lending capacity	SELL government securities → decreases bank reserves → less lending capacity
Bank rate	LOWER the bank rate → banks borrow more → more loans made	RAISE the bank rate → banks borrow less → fewer loans made

Historical Examples

• Low rates were kept for over a decade post-2008; this fuelled debt loads and housing booms
• Late 2017 / early 2018: three increases of 0.25% (total +0.75%) to signal debt reduction
• COVID-19 (2020): dropped rate by 1.5% over three quick moves to 0.25%, held until Feb 2022

Cross-Course Connections

Money — Bank of Canada controls the money supply (M-1 and M-2)
CharteredBanks — bank rate determines chartered banks’ cost of borrowing
EconomicIndicators — monetary policy (Bank of Canada) is the key lever for managing inflation and GDP
InternationalBankingAndFinance — exchange rates are indirectly affected by Bank of Canada rate decisions

Key Points for Exam/Study

• Bank of Canada formed 1935; Canada’s central bank — NOT a commercial bank
• Bank rate = the rate chartered banks borrow from BoC; basis for prime rate
• Two tools: open market operations (buy/sell gov securities) + bank rate adjustments
• Expansionary = buy securities + lower rate → ↑ money supply → ↑ spending → ↑ inflation
• Restrictive = sell securities + raise rate → ↓ money supply → ↓ spending → ↓ inflation
• BoC dropped rate to 0.25% during COVID (2020), held until Feb 2022

Open Questions

• How does quantitative easing differ from standard open market operations, and has the Bank of Canada used it?

graph TD
    BoC[Bank of Canada]
    BoC -->|"EXPANSIONARY POLICY"| E1[Buy government securities]
    BoC -->|"EXPANSIONARY POLICY"| E2[Lower bank rate]
    BoC -->|"RESTRICTIVE POLICY"| R1[Sell government securities]
    BoC -->|"RESTRICTIVE POLICY"| R2[Raise bank rate]
    E1 -->|"↑ bank reserves"| E3[More loans made]
    E2 -->|"↑ willingness to borrow"| E3
    E3 --> E4[↑ Money supply\n↑ Spending\n↑ Inflation risk]
    R1 -->|"↓ bank reserves"| R3[Fewer loans made]
    R2 -->|"↓ willingness to borrow"| R3
    R3 --> R4[↓ Money supply\n↓ Spending\n↓ Inflation]