Uncover the significance and functions of the Bank of Canada and how it influences newcomers to the country.

Since 2001, the Bank of Canada (BoC) has increased interest rates to their peak.

Currently, the lending rate is 4.75%. It is higher than the most recent increase in January this year, which raised about 25 points overnight.

Since July 2022, the Bank of Canada has begun growing its rates which grew from 1.5% to 2.5%. This illustrates that the rate has increased by 3.25 percentage points within a year.

The recent rate boost has surprised numerous, as the Governor of the BoC, Mr.Tiff Macklem, has earlier mentioned that the Bank of Canada would attempt to avoid the additional rate expansions.

According to the BoC, the previous increases were expected to cut down customer spending to the extent that could help slow and stabilize the economy. But BoC noticed unanticipated expenditure on interest-sensitive products, including the housing market.

BoC further mentioned that the labor market in Canada is still tight, and participation rates and immigration have raised the worker supply, who are being hired at faster speeds. This shows that Canada’s economy is still in high demand.

In recent months, the Bank of Canada has continued to maintain the high-interest rates in order to limit consumer spending and lower the inflation level in the country, which is presently at 4.4%.

As per the theory, less expenditure suggests less demand for products and services. This implies that in order to meet consumer needs, businesses do not need to make additional efforts, and they can or need to reduce prices.

What is the Bank of Canada (BoC)?

In 1934, the Bank of Canada, or BoC, was established as the Central Bank of Canada, and in 1938, it became a crown corporation. Typically, the federal government of Canada owns the BoC; however, it mostly operates as an independent organization.

As per the Bank of Canada Act, the aim of the Bank is to control the currency and credit in a manner that is most beneficial for the economic life of the country.

The BoC controls various functions, such as creating policies and establishing interest rates that will positively impact Canada’s economy. Majorly, BoC has four key responsibilities, which are stated below:

• Monetary policy: The Bank of Canada controls the supply of money circulation in the economy of Canada. It uses the monetary policy framework to maintain inflation at lower and stable levels.
• Financial system: The BoC promotes secure, useful, and efficient financial systems in Canada as well as across the world. It also engages in financial market transactions to support these purposes.
• Currency: The BoC is also responsible for designing, issuing, and distributing Canadian bank notes.
• Funds management: BoC acts as the “fiscal agent” for the Canadian government and manages its public debt programs and foreign exchange reserves.

Although the federal government owns the Bank of Canada, the BoC website outlines some areas where both the federal government and the BoC are distinct:

• The Governor and the Senior Deputy Governor are nominated by the Board of Directors of the Bank with the consent of the Cabinet. The federal government has no role in it.
• The Deputy Minister of Finance is present among the Board of Directors but does not vote.
• The BoC submits its expenses to its Board of Directors, while the Departments of the Federal Government submit their expenses to the Treasury Board.
• BOC regulates its employees, itself, with no interference from federal public service agencies.
• The books and records of the BoC are audited by the auditors selected by the Cabinet (on Finance Minister’s recommendation). There is no role of the Auditor General of Canada.

According to the BoC, it is able to employ the medium- and long-term approaches that are valuable to operating effective monetary policy, as it is independent from political processes.

Regardless, as per the Bank of Canada Act, when both the Bank of Canada and the federal government conflict on monetary policy, the Finance Minister can provide the Governor a written directive regarding monetary policy after conferring with the Governor and with his consent in Council. The directive must specify specific terms, it must be valid for a defined period, and the BoC has to agree with it.

What is the impact of high-interest rates on newcomers?

Simply put, the high-interest rates imply that for newcomers, it will be more costly to borrow money from the BoC to spend on bigger purchases such as a car or house.

The newcomers will find it challenging to buy a home in Canada due to the more expensive mortgages, which cause them to rent a home.

Renting a home in Canada can be expensive for newcomers with little to no knowledge. For instance, a report suggests that the present average rent of a one-bedroom apartment is $2,425 per month in Toronto.

The labor shortage in Canada is also increasing the demand for skilled newcomers. As per the Immigration Levels Plan 23-25, Canada aims to admit 500,000 new PRs each year by the end of 2025.

In parts, the figure appears to be quite high, as various employment sectors are managing the skilled worker shortage. IRCC is set to start holding the new EE category-based draws this summer to assist Canada in meeting the immigration target along with addressing the labor shortages. The new draws will target candidates with work experience in specific, in-demand professions.

Nonetheless, an increased number of people will contribute to more expenditure and increased demands for products, services, and housing, making it more difficult to lower interest rates. It is uncertain how the Bank of Canada will handle interest rates and move forward in the future.