Bank of Canada

If over 97.5% of our money is created by privately owned commercial banks what does the BoC do?

About the bank:


  • Monetary policy: The Bank indirectly influences the supply of money circulating in the economy, using its monetary policy framework (which means to set the policy rate) to keep inflation low, stable, and predictable.
  • The overnight lending rate otherwise known as "The Policy Rate" is the rate of interest that commercial banks charge each other for overnight loans as set by the BoC
  • To understand this there are some excellent videos provided by Payments Canada. This is where it gets a little complicated but if you absorb the information in the order that they are presented you, by the end you will understand how our money system works. Click on the following link to connect with Payments Canada website:

Then scroll down and start with module 1- Intro CPA followed by module 6 - Large Value Transfer System. If you are just interested in what the overnight lending rate is go directly to module 6. 

So, how effective is the policy rate in controlling the money supply?

People are more willing to take on loans when the interest rates are low. Which means a greater supply of money circulating in economy and when the interest rates are high people are less likely to take on loans. There is an important distinction to be made here. The BoC increases or decreases its policy rate which affects all other rates, loans, mortgages etc., or in other words the availability of credit. 

Changes in the target for the overnight rate influence other interest rates, such as those for consumer loans and mortgages. They can also affect the exchange rate of the Canadian dollar.

In November 2000, the Bank introduced a system of eight fixed dates each year on which it announces whether or not it will change the policy rate.

There can be a significant lag before interest rate changes influence spending and saving decisions, and thus have an impact on overall demand and supply, and hence, inflation. The time lag is variable, but research suggests that it can take six to eight quarters (one and a half to 2 years) for a change in the policy rate to have its full effect on inflation. This is why monetary policy decisions have to be made with a view to the future, mindful of the associated uncertainty.  

Bank of Canada, 234 Wellington Street in Ottawa

Bank of Canada, 234 Wellington Street in Ottawa