Sector by Sector: The Bank of Canada

April 16, 2019

 

At first glance, it might not seem like the Bank of Canada plays much – or any – of a role in your daily life.
The simple reason for that is most of us don’t deal directly with the Bank of Canada. But if you have a mortgage, a loan, a credit card, or a line of credit – as almost all Canadian adults do – you do deal directly with an institution (your bank) that is influenced by the monetary policy changes made by the Bank of Canada.

That was a bit of a mouthful, so to help make things a little more plain, we’ve taken a look at how four major industries ultimately feel the effects of decisions made by the Bank of Canada.

Finance

Let’s start with the most obvious connection.

The Bank of Canada’s most effective tool for influencing monetary policy is its overnight interest rate. Around eight times per year, the Bank announces whether it will raise or lower the rate, or keep it the same.

This rate has a trickle-down effect on all major Canadian banks over time. If over a two year period the Bank of Canada raises its overnight rate by one per cent, banks will follow suite to compensate by raising interest rates on things like mortgages, credit cards, and lines of credit.

While the higher return on interest is a benefit to the lender, higher rates will also discourage citizens from borrowing from the banks.

Real Estate

Perhaps one of the most significant considerations your average Canadian should be giving to the Bank of Canada, is the effect it can have on mortgage interest rates.

While it typically takes years for any kind of noticeable trend – good or bad – to develop, an increase to a mortgage rate of even half a point could result in an additional $150 per month for the homeowner.

As the Bank’s overnight rate goes up – as it has since 2017; from 0.75 per cent to 1.75 per cent currently – fewer people will be in the market to buy real estate.

Small Business

According to Statistics Canada, small businesses account for 97 per cent of businesses across the country, and employ over 70 per cent of Canada’s total private workforce.

Any small or start-up business is sure to feel the impact of an interest rate hike, as these businesses, for the most part, rely on some sort of funding.

An increase of $1.00 per month in interest payments directly translates to a decrease of $1.00 per month in profits.

Government/Policy

All levels of government should be interested in hearing what the Governor of the Bank of Canada has to say, and the reason is simple.

The Bank and its staff base their decisions on emerging trends within Canada’s economy. When the economy slows, the Bank takes measures to encourage spending, and when growth reaches a boiling point, it slows things down again to keep inflation predictable and consistent.

By closely monitoring decisions being made by the Bank of Canada – and attending events like our VIP luncheon with Bank of Canada Governor Stephen Poloz – elected officials and government employees can not only get a good picture of the current state of Canada’s economy, but also a sense of the direction in which its trending.


VIP Luncheon with the Bank of Canada and ​Stephen Poloz

Monday, May 6
11:00 a.m. – 2:00 p.m.
RBC Convention Centre Winnipeg