WHO DECIDES HOW MUCH YOUR LOAN WILL COST?

 

The Bank of Canada’s Role in 

Canada’s Debt and Spending

The Bank of Canada (BoC) plays a key role in Canada's financial system, acting as the central bank, but it does not directly fund the government. Instead, it influences interest rates and the overall cost of borrowing. Here's a plain-language breakdown of how the BoC fits into the picture:

What the Bank of Canada Does

Sets Interest Rates: The BoC sets the 'overnight rate,' which affects borrowing costs for everyone—individuals, businesses, and the government. Higher rates make borrowing more expensive; lower rates make it cheaper.
Buys and Sells Government Bonds (in the secondary market): The BoC can buy government bonds after they are sold to the public (not directly from the government). This influences liquidity and interest rates, as seen during the COVID-19 crisis (quantitative easing).
Acts as the Government’s Banker: The BoC manages the government’s accounts, processes payments, and helps issue new debt to the market.
Stabilizes the Financial System: The BoC manages the money supply and ensures banks have enough liquidity to lend, stepping in during crises if necessary.

How the BoC and Government Interact

- The government sells bonds to fund spending.
- Investors (pension funds, banks, foreign investors) buy those bonds.
- The BoC’s interest rate policy affects how much interest the government pays on its debt.
- If the market becomes unstable, the BoC may buy bonds in the secondary market to keep rates stable.
- The BoC's policies impact the entire economy, not just the government.

Bottom Line

- The government’s fiscal policy (taxes, spending) and the BoC’s monetary policy (interest rates, money supply) are separate but closely linked.
- The BoC acts like a referee or choreographer, trying to balance inflation, debt levels, and economic growth.
- As debt grows, the government's borrowing costs increase when the BoC raises rates to fight inflation. Cheaper borrowing comes with lower rates but risks inflation.