4 ways Canadians will pay more after a Bank of Canada rate hike | CBC News (2024)

FAQs

What can the Bank of Canada do to increase the rate of growth of the money supply? ›

Canada's central bank, called the Bank of Canada (BOC), can expand monetary supply by engaging in asset purchases, such as government and corporate bonds. Money is also created by financial institutions through lending to businesses and consumers.

The primary tool the Bank uses to control inflation is the policy interest rate. A higher rate helps decrease inflation and a lower one helps it rise.

High interest rates are bringing down inflation expectations and slowing the pace that businesses are raising prices, while also creating considerable financial hardship for households, according to a pair of Bank of Canada surveys published Monday.

The Effect of Interest Rates

Higher interest rates tend to attract foreign investment, increasing the demand for and value of the home country's currency.

Commercial banks make money by providing and earning interest from loans such as mortgages, auto loans, business loans, and personal loans. Customer deposits provide banks with the capital to make these loans.

Major Sectors of Canada's Economy

In Canada, the service sector makes up two-thirds of the economy. Real estate, manufacturing, and natural resources are all also major sectors of the economy.

The financial sector has historically been among the most sensitive to changes in interest rates. With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates.

Major Canadian banks pay 0% interest on chequing accounts, whereas savings accounts can pay between 1.5% - 2.5%. With a savings account, you can separate money that is in surplus to your day-to-day requirement and earn a little extra.

To achieve the inflation target, the Bank of Canada adjusts (raises or lowers) its policy interest rate (the Target for the Overnight Rate),1 which in turn influences other market interest rates in the economy.

What are the risks of the Canadian economy? ›

Canada's economy enters the New Year facing a wide range of challenges and uncertainties: high interest rates, stalling economic growth, and rising unemployment.

The Bank of Canada has held its key interest rate steady at five per cent since July, waiting for more evidence that inflation is getting closer to two per cent. Its last projection suggested inflation would reach that target in 2025, a forecast many economists share.

As interest rates rise, the interest income from loans typically increases faster than the interest paid on deposits, leading to wider profit margins. Additionally, higher interest rates can boost the earnings of insurance companies and investment firms, as they often hold large portfolios of interest-sensitive assets.

Almost all the media coverage of Statistics Canada's recent economic report heralded the fact that Canada avoided a recession in the fourth quarter of 2023—the economy shrank by 0.3 per cent in the third quarter, so another decline at the end of the year would have technically meant a recession.

Through monetary policy, a central bank can undertake an expansionary or contractionary policy. An expansionary policy aims to increase the money supply. For example, the central bank might engage in open market operations. That means it will purchase short-term U.S. Treasury bills using newly-minted money.

If the Bank of Canada decides to increase the money supply, it purchases government of Canada securities. The sellers of these government securities deposit the funds they receive from the Bank of Canada in banks, which increases the banks' reserves.

If the Fed, for example, buys or borrows Treasury bills from commercial banks, the central bank will add cash to the accounts, called reserves, that banks are required keep with it. That expands the money supply.

The inflation-control target

First introduced in 1991, the target is set jointly by the Bank of Canada and the federal government and reviewed every five years. However, the day-to-day conduct of monetary policy is the responsibility of the Bank's Governing Council.