The Bank carries out monetary policy by influencing short-term interest rates. It does this by adjusting the target for
Posted: Wed Jul 06, 2022 5:55 am
The Bank carries out monetary policy by influencing short-terminterest rates. It does this by adjusting the target for theovernight rate on eight fixed dates each year.
For more information on the policy interest rate, seethis explainer.
Recent Data
2021-01-202021-03-102021-04-212021-06-092021-07-142021-09-082021-10-272021-12-082022-01-262022-03-022022-04-132022-06-010.00%0.25%0.50%0.75%1.00%1.25%1.50%1.75%
*As of 2021, a change takes effect the day after itsannouncement.
INFLATION
Benefits of low inflation
Low, stable and predictable inflation is good for theeconomy—and for your finances. It helps money keep its value andmakes it easier for everyone to plan how, where and when theyspend.
For example, companies are more likely to grow their businesswhen they know what their costs will be in the years ahead. Thishelps the economy expand at a sustainable pace, generating higherincomes and new jobs.
How inflation works
Prices tend to go up when the demand for goods and services ismore than the economy supplies.
Prices tend to go down when the economy supplies more goods andservices than people want or need.
When prices change so slowly that they don’t affect how peoplespend, save or invest, the Bank of Canada considersthis price stability.
Effects of high inflation
When prices go up, money can’t buy as much as it used to. Thisloss of purchasing power hurts everyone’s standard of living.
When inflation is high, consumers, businesses and investors areuncertain about what their costs will be from one day to the next.High inflation is often unstable and unpredictable, and that keepsthe economy from performing at its best.
High inflation makes life especially hard for people whoseincomes don’t keep pace with rising prices, such as pensioners andthose with low pay. This is because high inflation decreases thevalue of their incomes and savings.
Effects of deflation
A persistent decline in the level of prices can also have anegative impact on the economy. This iscalled deflation. It is usually a signthat something is seriously wrong with the economy. Deflation leadsto lower production and wages. This reduces demand from consumersand businesses, which then leads to still lower prices, and soon.
The one major episode of sustained deflation in Canada was inthe 1930s, during the Great Depression. A dramatic drop in spendingtriggered a decline in prices of more than 20 percent overfour years.
The rate of inflation
To measure inflation, we look at the consumer price index(CPI) and how quickly it is rising. For example:
At the Bank, we target a 2 percent inflation rate, the middle ofa 1 to 3 percent range. We have agreed with the federalgovernment that this is the best way for us to promote the economicand financial well-being of Canadians.
The words are sometimes confused, but there’s a differencebetween deflation and disinflation. Withdisinflation, prices still go up, but they don’t rise as fast. Forexample, if the rate of inflation is 2 percent one year and1 percent the next, the economy is experiencingdisinflation.
How we focus: core inflation
We don’t respond to every movement in inflation. And we don’tpay attention to one-time changes in price levels, such as thosecaused by a new sales tax rate. We focus on price changes that aremore widespread and persistent—ones that could push inflation awayfrom the target for a while.
To help us figure out which price changes to focus on, we use aconcept called “core inflation.” We have three different measuresof core inflation. Together, they help us look past the bumpsand wiggles of different price changes so that we can see theunderlying trend of inflation.
To learn more about why prices change and what this means forthe economy, check out The Economy, Plain andSimple.
The role of expectations
Inflation targeting plays an important role in ensuringpeople continue to expect inflation to be around 2 percent.And when people expect inflation to stay under control, they act ina way that tends to bring that about.
People will shrug off short-term changes in prices if theybelieve inflation will remain low in the long run. Businesses don’timmediately raise their prices, and consumers continue to spend andborrow. Their confidence that inflation will remain low helps keepinflation low by allowing the economy to stabilize after short-termbumps.
ANSWER THE FOLLOWING QUESTION IN YOUR OWN WORDS. I NEED A NEWANSWER. NO COPY-PASTE PLEASE. (thumbs up for sure foryour hard work)
question: What do you think the Bank of Canada will doabout the Target for the OvernightRate on the next interest rate announcementdate? Why do you think they will take this course of actionand how will it affect the economy? Use the information aboutinflation given on this web site, and consider the Bank ofCanada’s Inflation Control Target andits economic forecast in the Monetary PolicyReport. (5 marks)
For more information on the policy interest rate, seethis explainer.
Recent Data
2021-01-202021-03-102021-04-212021-06-092021-07-142021-09-082021-10-272021-12-082022-01-262022-03-022022-04-132022-06-010.00%0.25%0.50%0.75%1.00%1.25%1.50%1.75%
*As of 2021, a change takes effect the day after itsannouncement.
INFLATION
Benefits of low inflation
Low, stable and predictable inflation is good for theeconomy—and for your finances. It helps money keep its value andmakes it easier for everyone to plan how, where and when theyspend.
For example, companies are more likely to grow their businesswhen they know what their costs will be in the years ahead. Thishelps the economy expand at a sustainable pace, generating higherincomes and new jobs.
How inflation works
Prices tend to go up when the demand for goods and services ismore than the economy supplies.
Prices tend to go down when the economy supplies more goods andservices than people want or need.
When prices change so slowly that they don’t affect how peoplespend, save or invest, the Bank of Canada considersthis price stability.
Effects of high inflation
When prices go up, money can’t buy as much as it used to. Thisloss of purchasing power hurts everyone’s standard of living.
When inflation is high, consumers, businesses and investors areuncertain about what their costs will be from one day to the next.High inflation is often unstable and unpredictable, and that keepsthe economy from performing at its best.
High inflation makes life especially hard for people whoseincomes don’t keep pace with rising prices, such as pensioners andthose with low pay. This is because high inflation decreases thevalue of their incomes and savings.
Effects of deflation
A persistent decline in the level of prices can also have anegative impact on the economy. This iscalled deflation. It is usually a signthat something is seriously wrong with the economy. Deflation leadsto lower production and wages. This reduces demand from consumersand businesses, which then leads to still lower prices, and soon.
The one major episode of sustained deflation in Canada was inthe 1930s, during the Great Depression. A dramatic drop in spendingtriggered a decline in prices of more than 20 percent overfour years.
The rate of inflation
To measure inflation, we look at the consumer price index(CPI) and how quickly it is rising. For example:
At the Bank, we target a 2 percent inflation rate, the middle ofa 1 to 3 percent range. We have agreed with the federalgovernment that this is the best way for us to promote the economicand financial well-being of Canadians.
The words are sometimes confused, but there’s a differencebetween deflation and disinflation. Withdisinflation, prices still go up, but they don’t rise as fast. Forexample, if the rate of inflation is 2 percent one year and1 percent the next, the economy is experiencingdisinflation.
How we focus: core inflation
We don’t respond to every movement in inflation. And we don’tpay attention to one-time changes in price levels, such as thosecaused by a new sales tax rate. We focus on price changes that aremore widespread and persistent—ones that could push inflation awayfrom the target for a while.
To help us figure out which price changes to focus on, we use aconcept called “core inflation.” We have three different measuresof core inflation. Together, they help us look past the bumpsand wiggles of different price changes so that we can see theunderlying trend of inflation.
To learn more about why prices change and what this means forthe economy, check out The Economy, Plain andSimple.
The role of expectations
Inflation targeting plays an important role in ensuringpeople continue to expect inflation to be around 2 percent.And when people expect inflation to stay under control, they act ina way that tends to bring that about.
People will shrug off short-term changes in prices if theybelieve inflation will remain low in the long run. Businesses don’timmediately raise their prices, and consumers continue to spend andborrow. Their confidence that inflation will remain low helps keepinflation low by allowing the economy to stabilize after short-termbumps.
ANSWER THE FOLLOWING QUESTION IN YOUR OWN WORDS. I NEED A NEWANSWER. NO COPY-PASTE PLEASE. (thumbs up for sure foryour hard work)
question: What do you think the Bank of Canada will doabout the Target for the OvernightRate on the next interest rate announcementdate? Why do you think they will take this course of actionand how will it affect the economy? Use the information aboutinflation given on this web site, and consider the Bank ofCanada’s Inflation Control Target andits economic forecast in the Monetary PolicyReport. (5 marks)