How does the Bank of Canada change interest rates?

Sometimes you wonder how they establish interest rates. Being a professional Real estate investor, this information can be quite critical for you. Having a clear understanding give you the edge, then you can invest intelligently.

The Bank carries out monetary policy by influencing short-term interest rates. It does this by raising and lowering the target for the overnight rate. (The "overnight rate" is the interest rate at which major financial institutions Banks, credit unions and similar credit-granting organizations. borrow and lend one-day (or overnight) funds among themselves.)

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 target for the overnight rate.

One of the Bank of Canada's main jobs is to manage inflation. Low interest rates promote borrowing and risk taking, which expands the economy. Effectively, more money is chasing a fixed amount of goods. Demand goes up, and so do prices -- and wages.

The Bank of Canada tries to keep inflation at about two per cent so prices do not increase too much and erode consumers' buying power, which hurts the economy. If inflation rises above that level, the Bank of Consider considers increasing the interest rate, which slows down borrowing and economic expansion. If inflation falls below two per cent, it considers lowering interest rates to increase economic activity and demand for goods.

Changes in the target for the overnight rate usually lead to changes in other interest rates, and so affect people's spending decisions. This, in turn, influences the level of demand for goods and services. When demand exceeds supply, prices will rise.

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The above information is provided as a guideline and is not intended to give a professional legal advice. Please consult a real estate lawyer for their opinion on your particular case

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