Canadian financial landscape and economic integration are shaped by the Bank of Canada’s role and impact on newcomers. The Bank of Canada (BoC) has announced a higher rate than it has been since 2001.
The overnight lending rate has been increased by 25 basis points since the previous hike in January of this year, which stood at 4.75%. In July 2022, the BoC began boosting rates when the rate went from 1.5% to 2.5%. Over one year, this represents a 3.25 percentage point increase.
According to Governor Macklem of the BoC, the BoC will make efforts to prevent further rate increases, so the current rate increase is rather surprising.
Consumer spending is expected to decline due to the recent price hikes, leading to a deceleration and stabilization of the economy. According to the Bank of Canada, the property sector has seen unexpected increases in spending.
It also notes that the labor market remains tight, and increased immigration and participation rates are increasing the supply of high-demand employees. As a result, the Canadian economy still faces a significant demand.
In recent months, the BoC has maintained high-interest rates in order to limit consumer spending and bring down inflation, which is currently at 4.4%. As a result of consumers spending less, the market for goods and services will shrink. Consequently, companies can (or must) cut costs in order to satisfy customer demands.
Bank of Canada – What is it?
Founded in 1934 as the country’s central bank, the Bank of Canada became a crown corporation in 1938. Although owned by the government, it largely operates independently.
The Bank of Canada is responsible for setting interest rates and developing strategies that will benefit Canadian economic growth in accordance with the Bank’s Act.
BoC responsibilities include the following four areas:
- Monetary Policy: The Bank of Canada employs monetary policy to maintain low and stable inflation by influencing the supply of money in the Canadian economy.
- Financial System: The Bank promotes the safety, soundness, and efficiency of financial systems, both domestically and internationally, while conducting transactions in financial markets to support these goals.
- Currency: The Bank of Canada is responsible for the design, issuance, and distribution of Canada’s bank notes.
- Funds Management: Serving as the fiscal agent for the Government of Canada, the Bank manages public debt programs and foreign exchange reserves.
The BoC website stresses some differences between it and the federal government, despite its ownership by the federal government:
- Governor and Senior Deputy Governor: The Bank’s Board of Directors, with Cabinet approval, appoints the Governor and Senior Deputy Governor, rather than the federal government.
- Deputy Minister of Finance: The Deputy Minister of Finance holds a position on the Board of Directors but lacks voting rights.
- Expenditures: The Bank of Canada submits its expenditures to its Board of Directors, while federal government departments present theirs to the Treasury Board.
- Employee Regulation: The Bank of Canada governs its employees rather than federal public service agencies.
- Auditing: External auditors appointed by Cabinet, based on the Finance Minister’s recommendation, audit the Bank of Canada’s books, as opposed to the Auditor General of Canada.
As an independent institution, the Bank of Canada is able to adopt the long- and medium-term perspectives necessary to ensure successful monetary policy implementation.
After consulting with the Governor and receiving the Governor’s consent, the Minister of Finance can provide monetary policy directions to the Governor in accordance with the Bank of Canada Act. There shall be explicit terms in the directive, which shall operate for a specified period of time, and the BoC shall comply with it.
Bank of Canada’s role and impact on newcomers
Buying a house or car with a mortgage or a car loan becomes more expensive because interest rates are higher.
A higher mortgage rate may make buying a home in Canada more difficult for immigrants. As a result, many newcomers choose to rent their first homes instead of buying them, which could be more expensive. The average monthly rent in Toronto for a one-bedroom apartment currently stands at $2,425 per month.
A tight labor market in Canada creates a need for talented immigrants. As part of the Immigration Levels Plan, Canada will welcome 500,000 new permanent residents annually by 2025. Several industries are experiencing a shortage of competent workers, which contributes to this high figure.
It is anticipated that IRCC will begin conducting category-based selection draws later this summer for Express Entry candidates who have worked in high-demand occupations. By filling these gaps, Canada will be able to reach its immigration targets while assisting the country in achieving its immigration targets.
However, an increase in population may increase spending and the demand for goods, services, and housing, making it harder to lower interest rates. How the BoC will change going forward is unknown.
