The Bank of Canada (BoC; ) is a Crown corporation and Canada's central bank. Chartered in 1934 under the Bank of Canada Act, it is responsible for formulating Canada's monetary policy,OECD. OECD Economic Surveys: Canada 2000. OECD Publishing; 30 August 2000. . p. 45–. and for the promotion of a safe and sound financial system within Canada.Financial Stability and Central Banks: A Global Perspective. Routledge; November 2002. . p. 41–. The Bank of Canada is the sole issuing authority of Canadian banknotes,Gene Swimmer. How Ottawa Spends, 1996-97: Life Under the Knife. MQUP; 15 May 1996. . p. 379–. provides banking services and money management for the government, and loans money to Canadian financial institutions. The contract to produce the banknotes has been held by the Canadian Bank Note Company since 1935.
History
Prior to the creation of the Bank of Canada, the Bank of Montreal, then the nation's largest bank, acted as the government's banker, and the federal Department of Finance was responsible for printing Canada's government notes.
In 1933, Prime Minister R.B. Bennett instituted the Royal Commission on Banking and Currency and it reported its policy recommendations in favour of the establishment of a central bank for Canada. The Royal Commission's members consisted of Scottish jurist Lord Macmillan, Bank of England director Sir Charles Addis, Canadian former Finance Minister William Thomas White, Banque Canadienne de Montréal general manager Beaudry Leman, and Premier of Alberta John Edward Brownlee. One of Bennett's motivations was to lessen Canada's dependence on American banks based in New York, which he felt had dominant influence on the value of the Canadian dollar.
The bank was chartered by and under the Bank of Canada Act on 3 July 1934, as a privately owned corporation, a move taken in order to ensure the bank would be free from partisan political influence. The bank's purpose was set out in the preamble to the act: "to regulate credit and currency in the best interests of the economic life of the nation, to control and protect the external value of the national monetary unit and to mitigate by its influence fluctuations in the general level of production, trade, prices and employment, so far as may be possible within the scope of monetary action, and generally to promote the economic and financial welfare of the Dominion".Bank of Canada Act, R.S.C., 1985, c. B-2 current to 11 October 2016 With the exception of the word "Canada" replacing "the Dominion", the wording today is identical to the 1934 legislation.Bank of Canada Act S.C. 1934 Chap. 43 On 11 March 1935, the Bank of Canada began operations, following the granting of royal assent to the Bank of Canada Act.
Upon its initial creation, the bank was primarily tasked with anchoring Canada's economy globally and managing foreign exchange. The bank was not tasked with managing inflation.
In 1938, while William Lyon Mackenzie King was serving as prime minister, the bank was legally designated a federal Crown corporation. The minister of finance holds the entire share capital issued by the bank. No changes were made in the purpose of the bank.Bank of Canada Amendment Act S.C. 1938 Chap 42
The government appointed a board of directors to manage the bank, under the leadership of a governor.John Grant. A Handbook of Economic Indicators. University of Toronto Press; 1999. . p. 57–. Each director swore an oath of "fidelity and secrecy" before taking office.
In 1944, the Bank of Canada then became the sole issuer of legal tender banknotes in and under Canada.
During World War II, the Bank of Canada operated the Foreign Exchange Control Board and the War Finance Committee, which raised funds through Victory Bonds.Robert Bryce. Canada and the Cost of World War II: The International Operations of Canada's Department of Finance, 1939-1947. McGill-Queen's Press - MQUP; 20 May 2005. . p. 323–.William F. Hixson. It's Your Money. COMER Publications; 1997. . p. 124–. After the war, the bank's role was expanded as it was mandated to encourage economic growth in Canada.Howard G. Schaefer. International Economic Trend Analysis. Greenwood Publishing Group; 1995. . p. 164–. An Act of Parliament in September 1944 established the subsidiary Business Development Bank of Canada (BDC) to stimulate investment in Canadian businesses. Prime Minister John Diefenbaker's central-bank monetary policy was directed towards increasing the money supply to generate low interest rates, and incentivize full employment. When inflation began to rise in the early 1960s, then-Governor James Coyne ordered a reduction in the Canadian money supply.
Since the 1980s, the main priority of the Bank of Canada has been keeping inflation low.Akira Kohsaka. Fiscal Deficits in the Pacific Region. Routledge; 31 July 2004. . p. 3–. As part of that strategy, interest rates were kept at a low level for almost seven years in the 1990s.OECD. OECD Economic Surveys: Canada 1998. OECD Publishing; 18 December 1998. . p. 137–.
Following the 2008 recession, the central Bank of Canada lowered interest rates to stimulate the economy, but did not practice quantitative easing, as it feared that dramatically increasing the money supply would lead to hyperinflation.
Between 2013 and early 2017, the Bank of Canada temporarily moved its offices to 234 Laurier Avenue West in Ottawa to allow major renovations to its headquarters building.
In mid 2017, inflation remained below the bank's 2% target, (at 1.6%), mostly because of reductions in the cost of energy, food and automobiles; as well, the economy was in a continuing spurt with a predicted GDP growth of 2.8 percent by year end. On 12 July 2017, the bank issued a statement that the benchmark rate would be increased to 0.75%. "The economy can handle very well this move we have today and of course you need to preface that with an acknowledgment that of course interest rates are still very low," Governor Stephen Poloz subsequently said. In its press release, the bank had confirmed that the rate would continue to be evaluated at least partly on the basis of inflation. "Future adjustments to the target for the overnight rate will be guided by incoming data as they inform the bank's inflation outlook, keeping in mind continued uncertainty and financial system vulnerabilities." Poloz refused to speculate on the future of the economy but said, "I don't doubt that interest rates will move higher, but there's no predetermined path in mind at this stage".
By the end of 2018, the Bank of Canada had raised rates up to 1.75% from a low of 0.5% in May 2017 in response to robust economic growth. Rates remained at 1.75% for the duration of 2019.
In March 2020, interest rates were quickly lowered to 0.25% in response to the economic conditions caused by the COVID-19 pandemic. Additionally, the Bank of Canada undertook the controversial practice of quantitative easing, whereby the Central Bank increases the money supply to create funds for government spending. The sudden increase in the money supply contributed to Canada's inflation rate reaching 4.8%, the highest in over 30 years. By October 2021, the Central Bank stopped its practice of quantitative easing, and accelerated the timeline of increasing interest rates to pre-pandemic levels.
In March 2022, The Bank of Canada raised its benchmark interest rate for the first time in over three years, claiming that future rate increases are needed to fight inflationary pressures expected to worsen due to the Russian invasion of Ukraine. Canada's central bank raised its overnight rate goal by a quarter-percentage point to 0.50 percent. After the Bank of England, the Bank of Canada is the second Group of Seven central banks to raise rates since the outbreak began.
On 29 November 2022, the Bank of Canada reported its quarterly earnings for the third financial quarter of that year. It reported a loss of C$522 million. This was the first time in its history that it reported a loss. This loss was first reported on in a 12 September 2022 op-ed in the Toronto Star. The op-ed blamed the bank's emergency quantitative easing policy it took following the COVID-19 pandemic. The bank responded to the op-ed saying that they do expect to return a loss as "the bank's interest expense is growing because of increases in the interest rate that we pay on deposits."
Roles and responsibilities The mandate of the Bank of Canada is defined in the Bank of Canada Act preamble, which states, WHEREAS it is desirable to establish a central bank in Canada to regulate credit and currency in the best interests of the economic life of the nation, to control and protect the external value of the national monetary unit and to mitigate by its influence fluctuations in the general level of production, trade, prices and employment, so far as may be possible within the scope of monetary action, and generally to promote the economic and financial welfare of Canada.
The Bank of Canada's responsibilities focus on the goals of low, stable and predictable inflation; a safe and secure currency; a stable and efficient financial system in Canada and internationally; and effective and efficient funds-management services for the Government of Canada, as well as on its own behalf and for other clients.
In practice, however, it has a more narrow and specific internal definition of that mandate: to keep the rate of inflation (as measured by the Consumer Price Index) between 1% and 3%.Jagdish Handa. Monetary Economics. Psychology Press; 2000. . p. 4–.Macroeconomic Causes of Unemployment: Diagnosis and Policy Recommendations /: Makroökonomische Ursachen der Arbeitslosigkeit: Diagnose und Therapievorschläge. Duncker & Humblot; 3 March 2015. . p. 271–. Since adoption of the 1% to 3% inflation target in 1991 and 2019, the average inflation rate was 1.79%. The most potent tool the Bank of Canada has to achieve this goal is its ability to set the interest rate for borrowed money.Principles of Macroeconomics, 6Ce. 2 October 2013. . p. 236–. Because of the large amount of trade between Canada and the United States, specific adjustments to interest rates are often affected by those in the US at the time.
The Bank of Canada is the sole entity authorized to issue currency in the form of bank notes in Canada. The bank does not issue coins; they are issued by the Royal Canadian Mint.
Canada no longer requires banks to maintain fractional reserves with the Bank of Canada. Instead, banks are required to hold highly liquid assets such as treasury bills equal to 30 days of normal withdrawals (liquidity coverage), while leverage is primarily tied to adequate loss-absorbing capital, notably tier one (equity) capital.
Type of government institution The Bank of Canada is structured as a Crown corporation rather than as a government department, with shares held in the name of the minister of finance on behalf of the Canadian monarch. While the Bank of Canada Act provides the minister of finance with the final authority on matters of monetary policy through the power to issue a directive no such directive has ever been issued. The bank's earnings go into the federal treasury. The governor and senior deputy governor are appointed by the bank's board of directors. The deputy minister of finance sits on the board of directors but does not have a vote. The bank submits its spending to the board of directors, while departmental spending is overseen by the Treasury Board with their spending estimates submitted to Parliament. Its employees are regulated by the bank and not the federal public service agencies.
Bank of Canada's balance sheet