Monetary Policy: How Monetary Policy Works A) In definition form, monetary policy is the process where The Bank of Canada looks to promote the economic and financial well-being of Canadians. It is one of four of The Bank of Canada’s functions. Monetary policy controls money supply and regulates money and credit in the economy, preserving the value or “purchasing power” of the country’s currency in the process. The main objective for the monetary policy is to keep inflation low, stable, and predictable. It also influences interest rates through the bank rate. Now that we set the background information about monetary policy is, it’s time to breakdown how it actually works. The Bank of Canada carries out monetary policy through changes in its policy interest rate. By lowering the interest rates, it pushes people to save less and borrow/spend more. Meanwhile, raising the interest rates will cause for the opposite to happen where people will be saving more and will be reluctant to buy items due to those increased interest rates. A rise or drop in this policy rate in Canada relative to other nations can make Canadian-dollar assets less or more attractive to investors, either lowering or raising the exchange rate on the Canadian dollar. When the value for the Canadian dollar is lower, it boosts exports and restrains imports and vice versa. To sum it up, a reduction in the policy rate is expected to boost total demand for Canadian goods/services. Meanwhile, if it is increased it will restrain the total demand. Even so, if the total demand is too strong or too weak, then the economy is operating above or below its production capacity. This means that inflation will be pushed above or below its target. This then prompts a decision from the Bank whether to raise or lower its policy rate to curb or reinforce spending and return inflation to its target it has set out. Overall, it is most important to remember that monetary policy is mainly there to keep inflation in check, and to ensure that it does not get out of control. B) An issue that raised a lot of questions for me is about the increased interest rates. When interest rates are increased, many citizens will have a hard time paying off debts. As mentioned by Rochon in his article, “It’s time to rethink monetary policy”, he is referring to the fact that the inflation rate was the lowest it’s ever been in 20 years, and is shocked that they decided to lower rates. Rochon claims that lowering the rates was a nonsensical decision because inflation does not reflect a current threat, and as of then, there were not any inflationary pressures in the economy, making the increase all the more confusing. A question that I brainstormed is: Was the decision to raise the interest rates worth it in the end? Considering that that the inflation rate is already low, and that the increase can cause even more issues, placing a financial burden on many? Another question I had was: How did people perceive Rochon’s argument? Do they agree or disagree? Works Cited “Understanding how monetary policy works” bankofcanada.ca, Bank of Canada, April 5, 2021 https://www.bankofcanada.ca/2021/04/understanding-how-monetary-policyworks/?page_moved=1. Accessed 09 May 2022. Rochon, Louis-Philippe. “It’s time to rethink monetary policy.” CBC News, CBC/Radio-Canada, 22 July 2017, https://www.cbc.ca/news/opinion/opinion-rethinking-monetary-policy1.4215288. Accessed 09 May 2022.
