What Are These Central Banks, Anyway?

As a farmer, you’re probably not terribly interested in what a central bank is or what it does. The trouble is, they seem to be everywhere these days, influencing everything from stock markets to prices for the commodities Canadian farmers produce. As such, having a working knowledge of central banks could be useful as you go about your daily routine.

What is the Bank of Canada?

In a nutshell, the Bank of Canada is the country's central bank. Its role is “to promote the economic and financial welfare of Canada,” as enshrined in the Bank of Canada Act.

The Bank of Canada is charged with influencing the supply of money circulating in the economy, with the goal of keeping inflation low and stable. This hasn’t been going so well over the past year, with inflation soaring to the highest in decades.

The central bank manages public debt programs and foreign exchange reserves for the Government of Canada. It also issues and distributes Canada’s banknotes.

Last, but not least, the Bank of Canada oversees financial systems within Canada and internationally. Their goal is to keep these systems safe and efficient.

The information above is largely from the Bank of Canada’s website. As an aside, you may notice that there is no mention in the central bank’s raison d'être of striving to maintain low unemployment levels and buoyant stock markets.

How is the Bank of Canada structured? How does it get things done?

The policy-making body of the central bank is known as the Governing Council. The council is made up of the Governor, the Senior Deputy Governor and four Deputy Governors.

You may have heard the name Tiff Macklem in the media. He is the Bank of Canada’s tenth Governor, appointed in June 2020 for a term of seven years.

The council's main tool for conducting monetary policy is setting the target for the overnight rate. This benchmark short-term interest rate is normally set at eight fixed announcement dates, scattered throughout the year. The next meeting is on December 7.

In a typically Canadian twist, the Council must reach its decisions about the key interest rate by consensus. This is different than for many other central banks, which operate on a one-person, one-vote majority system.

The verbiage used by the central bank when making its interest rate announcements and giving economic updates is closely scrutinized. In this way, the central bank also gets things done by signalling its plans and intent through statements, apart from of its direct actions with interest rates.

The Governor and Senior Deputy Governor are appointed by the Bank's Board of Directors (with the approval of Cabinet), not by the federal government.

The Deputy Minister of Finance sits on the Board of Directors but has no vote.

Is the Bank of Canada part of the government?

Well, there are some clear ties between the government and the central bank, as explained above.

However, the central bank is designed to be an independent monetary institution, thus separating the power to create money and the ability to spend it.

The central bank is also supposed to take a longer-term view of the country's economic situation than a government that is concerned with re-election. Sounds good in theory, although there have been times when the central bank seems to be rushing to put out wildfires as they pop up, rather than questioning why the proverbial forest is burning in the first place.

The Bank of Canada can adjust its short-term interest rate to influence economic growth and inflation, as noted above. This influences spending and saving by businesses and consumers. Eventually, it affects things like mortgages, lines of credit and other, longer-term interest rates which matter to average Canadians.

What about the US Federal Reserve? Do the same general ideas apply?

Short answer: Yes, The US central bank (The US Fed) is remarkably like the Bank of Canada.

The US Fed also strives to manage the economy, with a little more emphasis on employment than we have in Canada. The US Fed has also become entwined in underpinning stock prices since the 1990s, although this is rarely acknowledged directly or explicitly.

One of the most notable components of the US Fed is the Federal Open Market Committee (FOMC). It conducts monetary policy and its meetings are widely followed by the world’s media and economic pundits.

The next FOMC announcement is scheduled for December 14.

Source: DePutter Publishing Ltd.

Information contained herein is believed to be accurate but is not guaranteed by the parties providing it. Syngenta, DePutter Publishing Ltd. and their information sources assume no responsibility or liability for any action taken as a result of any information or advice contained in these reports, and any action taken is solely at the liability and responsibility of the user.