Bank of Canada - Roles and Responsibilities

Roles and Responsibilities

The mandate of the Bank of Canada is defined in the Bank of Canada Act preamble and it states, "WHEREAS it is desirable to establish a central bank in Canada to regulate credit and currency in the best interests of the economic life of the nation, to control and protect the external value of the national monetary unit and to mitigate by its influence fluctuations in the general level of production, trade, prices and employment, so far as may be possible within the scope of monetary action, and generally to promote the economic and financial welfare of Canada." The bank's current mission statement is: The Bank of Canada's responsibilities focus on the goals of low and stable inflation, a safe and secure currency, financial stability, and the efficient management of government funds and public debt.

In practice, however, it has a more narrow and specific internal definition of that mandate: to keep the rate of inflation (as measured by the Consumer Price Index) between 1% and 3%. Since the Bank's creation, the average annual inflation rate was 3.13%. The most potent tool the Bank of Canada has to achieve this goal is its ability to set the interest rate for borrowed money. The Bank of Canada periodically asks Statistics Canada to adjust the way the Consumer Price Index is calculated, a crucial factor in the calculation of inflation.

Historically, the Bank of Canada functioned as the financier of Canadian public deficits in the Federal, Provincial, and Municipal budgets providing loans to fund government spending at interest rates as low as 1%. This practice allowed for public debts to be more quickly repaid, but at the cost of higher inflation. The growth of the federal government through the 1960s led to rapidly increasing federal deficits. As these were covered by the Bank of Canada, inflation rose steadily from 2% in 1961 to a high of 12.5% in 1974. That year, with inflation at a 20-year high, the Government of Canada abandoned this method of financing in favor of borrowing from private banks at market rates on the reasoning that paying interest on its debt was less harmful to Canadians than high inflation - a policy now followed by most advanced economies.

It is important to distinguish between the right to "issue money," which is the sole right of the Bank of Canada, and the ability to "create credit," which, through legislation and regulation enacted by Parliament, is largely done by commercial banks through the issuance of loans. While all of Canada's money is created by the government through deficit spending, if "money" is thought of as the combination of issued money and bank-created credit, then presently, the Bank of Canada "issues" less than 5% of Canada's money, with the remainder (95%) being "created" by commercial banks through the process of fractional-reserve banking.