Chapter 7 - Money and the Canadian Banking System

Article: http://www.vancouversun.com/business/fp//1425343/story.html


Summary

The above article speaks about how the Bank of Canada’s monetary policy affects the mortgage rates. The Bank of Canada can influence both variable mortgage rates and fixed mortgage rates. Variable rate mortgages are derived from prime rates, which many financial institutes set according to the Bank’s. Fixed rate mortgages are based on bond yields, which are influenced by the market and dependent on the Bank’s moves. High bond yields create higher mortgage rates due to higher funding costs. As the Bank’s main focus over the past few years have been inflation, interest rates are increased and decreased to influence demand, in order to maintain a two percent inflation rate target. To further encourage lending, the central bank has been injecting liquidity into the financial system via purchasing assets from financial institutions. Through all this, it seems to have made bond yields in the market low, making fixed mortgage rates more appeasable.


Connections

The connection between this article and the chapter is the Bank of Canada’s monetary policy. It is described as the action taken by the Bank of Canada to alter the money supply, and ultimately economic conditions in the text. In this case, the Bank aimed to keep the inflation rate target of two percent through raising or lowering interest rates. Money supply is altered by the changing interest rates, and the economic condition is the rate of inflation.


Refection

I can see how it is important for the Bank of Canada to maintain control over the economy through controlling the money supply. In our recessionary times where people do not spend as much, the inflation rate will just keep rising. Changes in interest rates, mortgage rates, etc helps provide an incentive for people to borrow money and/or spend. It is nice to known that the Canadian central bank is constantly trying to fix an economic problem, even if the current one is globally affecting everyone else in the world as well.