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Controlling the Economy

by | Feb 25, 2015

Today we are looking at the Bank of Canada and how it affects our economy.

Have you been asking questions about the Canadian economy and its interest rates? Questions like….

  • What is going on with the mortgage industry?
  • Why are interest rates going down?
  • Why are housing prices staying high?
  • Who controls the prime rate that we base interest rates on?
  • Why is the Canadian dollar loosing value?
  • I thought the US and its poor economy would keep the dollar up!!

To answer these question we need to look at the Bank of Canada, our national centralized banking system.
Controlling the Economy
The Bank of Canada is a centralized banking institution that was created to monitor Canada’s financial system by:

  1. Preserving the value of Canadian money through trying to control the rate of inflation
  2. Monitoring Canada’s financial institutions (accountability)
  3. Production and distribution of Canada’s bank notes (dollar bills)
  4. Watchdog of the Government’s use of funds

Specifically, let’s look at inflation.
In 1995, the Canadian government adopted a policy called the Transmission of Monetary Policy.
This policy attempts to monitor Canada’s rate of inflation and economy by changing the policy interest rate (overnight lending rate).
The GOAL of changes in interest rates is to keep inflation low, stable, and predictable.
Inflation is the rate at which the level of prices of goods and services increases.
Deflation is the opposite of inflation.
Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum.
Therefore, the bank created a system of measuring inflation where the goal was to keep inflation at “2%” in a scale of 0 to 4%. This percentage rate reflects the total consumer price index.
Consumer price index -It is obtained by comparing, over time, the cost of a fixed basket of goods and services purchased byconsumers. …a gauge of cost of goods and services over a period of time.
As mentioned previously, the goal of the Bank of Canada is to try and manipulate Canada’s economy to a low, stable and predictable inflation of 2%.
This encourages Canadians to save and invest with confidence.
To see the entire presentation that Geoff Lee has prepared, please click below:

You can also download it as a PDF here.

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