What does the Bank of Canada actually do?

The Bank of Canada (BoC) is Canada's central bank, and its main job is to promote the economic and financial welfare of the country. One of its most important tools is setting interest rates, which has a direct impact on mortgage rates and overall borrowing costs.

🔑 What the Bank of Canada Does:

1. Sets the Policy Interest Rate (Overnight Rate)
   
   • This is the interest rate at which major banks borrow and lend short-term funds to each other.
     
   • It influences all other interest rates in the economy, including those for savings accounts, business loans, and mortgages.
     
2. Controls Inflation
   
   • The BoC targets 2% inflation, aiming to keep it within a 1–3% range.
     
   • It raises interest rates when inflation is too high and lowers them when inflation is too low or the economy needs stimulus.
     
3. Issues Currency
   
   • It prints and distributes Canadian money.
     
4. Promotes Financial System Stability
   
   • Monitors risks in the banking and financial systems and acts as a lender of last resort if needed.
     
5. Manages Government Funds and Debt
   
   • Acts as the federal government’s banker and debt manager.
     

💸 How the Bank of Canada Impacts Mortgage Rates

1. Variable Mortgage Rates
   
   • These are directly influenced by the BoC’s overnight rate.
     
   • When the BoC raises rates, variable mortgage rates typically go up, making monthly payments more expensive.
     
   • When the BoC lowers rates, variable mortgage rates usually go down, lowering payments.
     
2. Fixed Mortgage Rates
   
   • These are influenced more by bond markets, especially Government of Canada 5-year bond yields.
     
   • However, bond yields are affected by BoC policy expectations.
     
   • If the BoC signals future rate hikes, bond yields rise, and which can impact fixed mortgage rates (and vice versa).
     

📈 Example

• If inflation is high, the BoC might raise the overnight rate to slow down spending.
  
• As a result:
  
  • Variable mortgage rates go up quickly.
    
  • Fixed mortgage rates might also rise due to higher bond yields.
    
• This makes borrowing more expensive, which cools housing demand and slows inflation.
  

SummaryThe Bank of Canada sets the tone for all interest rates in the country, including those for mortgages. If you're a homeowner or planning to buy, BoC announcements and inflation trends are key indicators of where your mortgage rates might be headed.
Let me know if you’d like a breakdown on current mortgage trends or how to choose between fixed and variable!