Posted: September 9th, 2022

Central Bank of Canada

Central Bank of Canada
Introduction
A Central Bank is an independent agency within a nation that conducts monetary policy, provides the sentiment means to regulate banking sectors, and offers other financial services within the country. The Central Bank’s primary aims are to ensure the country’s currency is stable, keeping the rate of unemployment low, and prevention of inflation. Most countries’ Central banks are under the governance of a board that is comprised of its member banks. The director of the center is appointed by the chief elected official in the country through the approval of the county’s legislative body, keeping the Central Bank in alignment with the long term policy goals of the nation. The central Bank independence enables it to be free from the political influence within the country (Amadeo, 2020). This paper focuses on the Bank of Canada, providing background information, roles and objectives, method used in regulations, and other aspects related to the Bank’s support to the government operations. The paper also discusses the monetary policy concerning the back of Canada regulation.
TASK 1: BANK OF CANADA (BOC)
Background Information on Bank of Canada
Following the Great Depression of the 1930s, the current banking system in Canada came under criticism that contributed to a change in the governance of the banking system. Bennetts, Prime Minister, then suggested the establishment of a central finance system. The government of Canada developed a Royal Commission, in 1933 that was led by Lord Macmillan to develop a report for establishing a central bank system. Using the Royal Commission report, the legislative discussed various aspects that should be included in the Central Bank, including the relationship of the bank with the federal government, its independence, and issues regarding private versus public ownership (Bank of Canada, n.d). The federal government introduced a legislation of a central bank creation, which in July 1934 resulted t the formation of a Bank of Canada through the Bank Act. The BOC was officially opened in March 1935 under private ownership. However, in 1938, the Bank of Canada was made a made a public ownership following the amendment of the Bank Act. The Bank was headed by an appointed Governor serving for a seven-year term period. The Bank of Canada is located in Ottawa, in the Canada capital.
Objectives and Roles of the Bank of Canada
Upon establishment of the BOC as the Canada’s Central Bank, various objectives were put in place for the Bank of Canada to implement. The first objective of the BOC is the monetary policy objective, which involves price stability maintenance of the currency value. By maintain the price stability, the BOC ensures inflation is low, predictable, and stable. The objective of maintaining low and stable inflation is to encourage investments in Canada and Canadians to spend with confidence, which in return, boosts long-term investments and improvement of economic settings. Another objective of the BOC is enhancing financial stability in the country for sustaining economic growth and raising the living standards of Canadians. The financial stability objective involves dealing with issues related to monetary policy and providing guidance to policy actions in the financial sectors such as credit unions, banks, clearing and settlement systems, and financial markets. The financial stability objective is achieved through the provision of services related to central banking such as liquidity; participating in policy development and implementation, conducting oversight and resolution of critical fiscal market structures; and involving in research and analysis of fiscal policy and systems (Bank of Canada, n.d). The BOC has an objective of payment system oversight and currency provision, which involves the responsibility of issuing banknotes, designing them, producing, and distributing the notes and managing inter-banking. The BOC currency strategy incorporates four pillars that include development and production of notes that are easy to authenticate but difficult for counterfeiting; partnering with law-enforcement agencies and prosecutors to deter to banknotes counterfeiting; encouraging routine verification of banknotes by the public and retailers; and conducting a quality banknote life-cycle that includes efficient production, distribution, destruction, and replacement processes. The last objective of the BOC is to provide funds-management services for the Canadian government, the public and international clients.
The roles of the Bank of Canada are highly associated with its objectives. They include monetary stability roles that incorporate monetary policy and exchange rate policy. BOC also has the role of financial stability and regulatory roles, which includes the development of provident policy and supervising or overseeing the financial market structure (“Chapter 2: Roles and objectives of modern central banks”, n.d). The other role of the BOC is the policy process roles that involve foreign exchange intervention, foreign exchange reserves, management of liquidity, and as the last option lender. The Bank of Canada has the role of financial setup provision, which incorporates providing currency, providing banking and account management services, managing systems of payment, and registry provision. The BOC also has other functions that are aiming at ensuring public good for Canada and its citizens, including the management of debt, management of assets, development functions, consumer services, statistics functions, and conducting research.

Regulation Methods
The Bank Act developed a centrally regulated banking system that is based on macro-prudential regulations and steadiness of the country’s monetary system. The Bank of Canada is supported by the Office of the Superintendent of Financial Institutions (OSFI), which was developed in 1987 as an independent organ to provide public confidence, safety, and reliability of Canada financial systems (Forgione, Ammerman, & Ricchetti, 2020). The OSFI has the mandate of supervising and regulating banks and insurance companies registered under the federal government, loans and trust companies, cooperative credit and fraternal benefits associations, and pension plans. OSFI ensures all financial associations and institutions comply with the established governing legislations. OSFI uses the Supervisory Framework that was introduced in 1999 under the Financial Consumer Agency of Canada Act (FCAC). The Supervisory Framework was updated in 2010, coming into effect in 2013.
The Supervisory Framework involves various approaches that are used by the OSFI to achieve the goal of safeguarding the depositors and policyholders from loss. The approaches include consolidated supervision, which involves assessing all Canadian financial institutions of FRFI’s material entities that include branches, subsidiaries, and joint ventures that exist in Canada and internationally. The other approach used for the Supervisory Framework is the use of relationship manager. The OSFI designates the relationship managers for each financial institution in Canada to maintain an up-to-date risk assessment process. OSFI also uses the principle-based supervision, which involves the application of sound judgment to identify and assess risks associated with FRFIs, and determining the most appropriate method of adequately managing the risks based on the supervisory and regulatory available options (OSFI, 2014). The Supervisory Framework also consists of the supervisory intensity and intervention approach. The approach involves OSFI apply the supervision intensity on the financial institution based on nature, complexity, size, risk profile, and the potential impacts associated with institution failure. The other approach used is based on the external auditors of the financial institution, and the assessment works conducted by other institutions such as rating agencies, foreign regulators, and industry groups.
OFSI supervisory role also includes assessing all material entities of all banks in Canada and internationally to identify concerns that might impact Canadian financial stability. OFSI reports to the Financial Institutions Supervisory Committee (FISC). The FISC is comprised of representatives from the Bank of Canada, OFSI, Canada Deposit Insurance Corporation (CDIC), Financial Consumer Agency of Canada (FCAC), and the federal Department of Finance (Forgione, Ammerman, & Ricchetti, 2020). Another regulatory authority that supports Canada Central Bank is the FCAC, which is accountable for monitoring and supervising compliance of the financial institution regarding the measures of federal consumer protection. The agency also monitors and implements the financial institutions’ voluntary codes, providing awareness to consumers concerning financial institutions’ obligations, and monitors issues and trends that might have an impact on financial products and services.
TASK 2: MONETARY POLICY REGULATION
The monetary policy regulation ensures the nation’s monetary value is preserved by maintain a low, steady, and foreseeable inflation. The BOC is mandated to conduct a monetary policy regulation in the manner that boots the government of Canada and its citizens to achieve economic and financial well-being. To achieve economic stability in Canadians, the Bank of Canada has mechanisms in place of regulating money and credit to reserve the nations’ currency purchasing supremacy. The benefits associated with monetary policy include low and stable inflation that enable the creation of a favorable environment that can support steady and strong progress output, employment, and revenue rate over time. With low inflation, the investors and citizens will be encouraged to engage in long-term investments that would boost the economic growth rate, create jobs, and enhance productivity contributing to the improvement in Canadian living standards. This section evaluates monetary policy framework implemented by the Canadian Central Bank, including regulations and tools involved in the monetary policy.
Monetary Policy Framework
The monetary policy framework of Canada is composed of two primary components that include the inflation-control target and the flexible exchange rate. The components depend on each other in developing regulations and helping the Bank to exhibit its responsibility to the nations’ citizens. The inflation-control target was first implemented in 1991, which is considered the pillar of the Canadian monetary policy framework. The inflation-control target rate is set by the BOC in conjunction with the federal government and is reviewed in a five year term. The last renewal of the target control was conducted in 2016 with the next renewal scheduled in 2021. The target of inflation is set at two percent midpoint of a regulator range of one to three percent. The Bank of Canada measures inflation as the year-over-year rate of the total consumer price index (CPI) increase, which is considered the Canadians cost of living most relevant estimate (Bank of Canada, 2012). The other means used by the BOC to measure inflation is by monitoring the sets of “core” inflation measures such as the CPIX, which incorporates eight of the most unstable consumer price index components. The sets of “core” measures allow the BOC to focus on underlying trends that enable it to analyze the temporary changes in overall CPI inflation. The component of the flexible exchange rate of the Canada monetary policy framework enables the BOC to pursue a self-governing monetary policy that corresponds well with the economic circumstances of Canada, with the focus of achieving the target of inflation. The BOC depends on “buffer” created by shifts in the exchange rate to ensure the Canadian economy absorb and adjust to both internal and external shocks.
The Transmission of Monetary Policy
The monetary policy transmission is a process that involves changes in the policy interest rate in the Bank of Canada that affect various kinds of economic activities and eventually affecting the rate of inflation. The changes occur through four main channels of transmission that include commercial interest rates, the Canadian dollar exchange rate, the asset rates, and the expectations of public regarding the future economic growth, interest rates, and inflation. The four channels of monetary policy transmission are considered to impact the overall level of need for services and goods over time. The first channel of transmission of monetary value involves the commercial interest rates effects based on changes of Bank’s policy rate. The decline in the commercial interest rates results in the reduction of the costs of borrowing and cost for interest-bearing deposits, in turn inspires the borrowing ability, investing, spending, and on the other side, discouraging saving. However, when the commercial interest rates rise, there is an increase in both the borrowing costs and money paid on interest-bearing deposits. The rise results in the decline in borrowing, investing, and spending as most people are encouraged to save, thus declining the total demand for products and services. Effects in interest rates on asset prices, including stocks, houses, and bonds, also act as the transmission of monetary policy. For instance, high-interest rates can increase the prices of assets, which discourage investing, or spending, and borrowing (Bank of Canada, 2012). The other channel is the impact of caused on the exchange rate by the variations in the interest rate. High rates of interest on the Canadian dollar exchange rate relative to other countries make the assets in Canada more attractive to foreign investors, rising demand for the Canadian dollar. The changes of interest rate effects on the expectation of people are the last channel of transmission of monetary policy. The people’s expectations are considered to have an impact on firms’ and households’ decisions regarding the current savings, investments, and borrowing impacting the wages and good and services prices.
Tools for Conducting Monitory Policy
The Bank of Canada uses two major tools in conducting monetary policy, which are the Target of the Oversight Rate and the Bank Rate. The target of oversight rate, also recognized as the policy interest rate, is used by monetary institutes to determine the average interest rate that is required by the BOC in the overnight lending market conducted among the financial institutions. The lending process among major financial institutions is conducted electronically over the Large Value Transfer System (LVTS) to enable the institutions to process their dealings at the end of the day. Bank of Canada ensures the overnight trading is done within the operating band, which is one-half of the percentage point wide and has the Target for the Overnight Rate at its center. For instance, in case the operating band is 2.25 to 2.27 percent, then 2.50 percent would be the Target for the Overnight Rate (Bank of Canada, 2016). The BOC has the responsibility of controlling the economy by making changes in the Target for the Overnight Rate with such changes manipulating the market interest rates and other lending interest rates such as mortgage, deposit, and savings interest rates. For instance, the Bank of Canada can boost the economy by reducing the policy interest rates, which encourages businesses and people to borrow and spend. However, in the process that there is a fast economic growth that can result in inflation, the Bank of Canada increases the policy interest rates, which slows down the rate of borrowing and spending, hence controlling the rate of inflation. The bank rate is the second tool of monetary policy used by the BOC, which is the rate of interest that the BOC charges major financial institutions in Canada on one-day loans. The bank rate is normally used when the operating band rate is at the lowest, which is at 2.5 percent, with its one-quarter of percentage point wide being between 0.25 and 0.50, making the bank rate top of the band with 0.50 percent. Most financial institutions will divert to acquiring the bank rate rather than the target for the overnight rate.
Disinflation and Deflation
The other important aspects considered in the monetary policy are the disinflation and deflation. Disinflation is the process of slowing down the general price level increase rate, concerning the average prices for consumers’ goods and services. The deflation process involves year after year persistent of fall in the total consumer price index (CPI) levels resulting in negative inflation each year. The deflation can result in the economic downfall of the country, such as the one experienced in Canada during the Great Depression of the 1930s, which involved the average level of prices falling by more than 20% in four years. With such incidents, the economy goes to a deflationary spiral that includes falloff income, increasing borrowing, low production, and a decline in wages (Bank of Canada, 2012). Economic crisis can also be caused by health pandemics, such as the COVID 19 pandemic, that has to send most countries economic stability falling. In countries such as Canada, the occurrence of deflation could be harmful, which has led the Bank of Canada to view the equal concern of inflation risk moving above or below 2 percent target. The Bank of Canada acts symmetrically to ensure it avoids impacts that could result from significant deflation or inflation over the medium term.

References
Amadeo, K., 2020. Central Banks, Their Functions and Role. The Balance. Available at: < https://www.thebalance.com/what-is-a-central-bank-definition-function-and-role-3305827>. [Accessed on 24 Apr. 2020].
Bank of Canada, n.d. About the Bank. Available at: < https://www.bankofcanada.ca/about/>. [Accessed on 24 Apr. 2020].
Bank of Canada, 2016. Target for the Overnight Rate. Available at: < https://www.bankofcanada.ca/wp-content/uploads/2010/11/target_overnight_rate_jan2016.pdf.pdf>. [Accessed on 24 Apr. 2020].
Bank of Canada, 2012. Monetary Policy. Available at: < https://www.bankofcanada.ca/wp-content/uploads/2010/11/monetary_policy.pdf>. [Accessed on 24 Apr. 2020].
Chapter 2: Roles and objectives of modern central banks. Available at: < https://www.bis.org/publ/othp04_2.pdf>. [Accessed on 24 Apr. 2020].
Forgione, P., Ammerman, D., & Ricchetti, A., 2020. Banking Regulation 2020: Canada. Global Legal Insight. Available at: https://www.globallegalinsights.com/practice-areas/banking-and-finance-laws-and-regulations/canada#chaptercontent7>. [Accessed on 24 Apr. 2020].
OSFI, 2014. Supervisory Framework. Available at: < https://www.osfi-bsif.gc.ca/Eng/fi-if/rai-eri/sp-ps/Pages/sff.aspx>. [Accessed on 24 Apr. 2020].

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