Bank of Canada (BoC) In Fundamental Analysis

The Bank of Canada, also known as the BOC, is the central bank of Canada and a Crown corporation, which makes it accountable, through a relevant minister, to the Parliament for the conduct of its affairs.

The Canadian central bank was founded in 1934, and it is responsible for promoting a safe financial system within Canada as well as for formulating the monetary policy of the country.

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The BOC is also the sole issuing authority of Canadian banknotes, the Canadian dollar (CAD), and the contract to produce these banknotes has been held by the Canadian Bank Note Company since 1935.

The Bank of Canada is also responsible for managing the money and providing banking services for the government and for providing loans to financial institutions in the country.

The History of the Bank of Canada

The BOC was founded in 1934 under the Bank of Canada Act. The Act gave the Bank of Canada four major responsibilities.

These responsibilities include formulating monetary policies that determine the supply of money circulating within the economy, the design and issuance of the Canadian dollar, managing funds, and overseeing the activities of private banks within the country.

The Bank of Canada also manages the government’s public debt and the reserve of forex held by the government of the country.

The Bank of Canada Act was signed into law in 1938 by Canada’s former Prime Minister, William Lyon Mackenzie King.

By then, the BOC was legally regarded as a federal Crown corporation. Before the Bank of Canada was signed into law, the country’s largest bank, the Bank of Montreal, served as the government’s bank.

Since its creation in 1934, the BOC has always had a Governor that is tasked with handling the bank’s operations. Its first Governor, Graham F. Towers, presided for 20 years, and the Bank has had nine governors as of July 2020.

The Minister of Finance appoints the members of the board of directors, and each of them serves for three years in such capacities.

Interestingly, the BOC provides the Canadian minister of finance with the final authority on matters of monetary policy, and all of the bank’s earnings go into the federal treasury.

Bank of Canada Governance

The BOC is managed by the Governing Council, the body tasked with making policies. They are responsible for conducting monetary policies and for promoting a safe and efficient financial system.

The Governing Council is comprised of the Governor, the Senior Deputy Governor, and four other Deputy Governors.

The central Bank of Canada also has an executive council that is comprised of the Governing Council and the Chief Operating Officer. They work together to chart the strategic direction of the BOC.

The Governor and Senior Deputy Governor are appointed by the bank’s board of directors, and while the deputy minister of finance sits on the board of directors, he does not have a vote.

The bank’s expenses are submitted to the board of directors, while all departmental spending is overseen by the Treasury Board and then submitted to Parliament. All bank employees are regulated by the bank itself.

The BOC headquarters are located at 234 Wellington Street in the city of Ottawa, Ontario, the capital city of Canada.

The Bank has operated in this location since 1980 after working in several other locations in the country. The regional offices can be found in Vancouver, Calgary, Toronto, Montreal, and Halifax.

Function and Roles of the Bank of Canada

The Bank of Canada handles several operations that ensure that the economic and financial environments in Canada thrive. Some of the functions and roles of the BOC include:

Interest Rate: The BOC is responsible for setting the interest rate, and it is decided on eight times a year. The interest rate is the interest charged when banks lend money to each other, and the BOC will generally impose rate cuts to boost the economy.
Monetary Policy: The BOC dictates the supply of money circulating in the Canadian economy by using the monetary policy framework to keep inflation stable and low.
Financial System: The BOC handles the promotion of a safe and efficient financial system at home and abroad. They carry out transactions within the financial markets that help achieve these objectives.
Currency: The Bank of Canada is responsible for designing, issuing, and distributing Canadian dollar (CAD) notes. Interestingly, the Governor’s signature is printed on all Canadian paper money.
Funds Management: The BOC serves as the fiscal agent for the government of the country as it manages its public debt portfolios and forex reserves.

Bank of Canada Monetary Policy Tools

The foundation of the BOC’s monetary policy framework is its inflation-control system. The bank’s main goal is to keep inflation near 2%, which is the mid-point of a 1 to 3% target range.

This target was first introduced in 1991, and it is set by both the Bank of Canada and the federal government. It is also reviewed every five years, and it helps the bank to evaluate the effectiveness of the monetary policy while also increasing the predictability of inflation. The Bank of Canada implements monetary policy tools to preserve the value of money by keeping inflation low, stable, and predictable.

Canada’s monetary policy framework has two key components that operate together as follows:

The Inflation-control Target: The inflation-control target is at the heart of the monetary policy framework in Canada. The inflation target is set around 2%, and it is reviewed every five years. Under the inflation-control target, the target for the overnight rate is essential. It is the interest rate that the Bank expects to be used in financial markets for single day loans between financial institutions.
Flexible Exchange Rate: The flexible exchange rate or floating dollar allows the BOC to go after an independent monetary policy that will benefit Canada’s economic circumstances the most. The flexible exchange rate helps the BOC to achieve its inflation target. Changes in the exchange rate also serve as a buffer, helping the Canadian economy to absorb and adjust to both internal and external shocks.

Bank of Canada in Fundamental Analysis

The Bank of Canada is one of the most influential central banks in the world. The currency it issues, the Canadian dollar (CAD), is one of the major currencies in the world and is traded against the other top currencies like the US Dollar, British Pound, Euro, Japanese Yen, Swiss Franc, and others.

The CAD is often referred to as the ‘Loonie’ which is the name of the aquatic bird that appears on the one Canadian dollar coin.

Geopolitical issues and international conflict have greatly affected the CAD over the years, and today, modern valuation of this currency is driven mainly by the strength of the Canadian economy, foreign trade and the pricing of commodities such as crude oil.

To put it into perspective, in 2019, Canada was the fifth-largest producer and exporter of crude oil in the world. Crude oil is the biggest contributor of forex to Canada, and its share has been increasing. Rising oil prices could lead to a more robust CAD, while a declining oil price could hurt the CAD.

During the coronavirus pandemic, the BOC held its benchmark interest rate steady at 0.25%. As a result of this, it impacted the rates that Canadian borrowers and savers got from their banks in terms of their mortgages, experiencing minimal changes in the lending rate.

By cutting the interest rate, the BOC was able to encourage borrowing and investing to stimulate the economy. The BOC also started bond and debt-buying programs to stimulate more cash in the system.

** Disclaimer – While due diligence, care and research have been undertaken to compile the above content, it remains an informational and educational piece only. None of the content provided constitutes any form of trade or investment advice or recommendation and should not be construed as such.

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The BoC is no doubt the most impactful Central Bank when it comes to Canadian equities and CAD-related instruments. Following the economic indicators and performing a thorough fundamental analysis can reveal the potential BoC interest rate hikes and cuts.

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