CENTRAL BANKS & THEIR ROLES

Within a country, there are usually numerous privately owned

banks. An agency must regulate and supervise that the banks are
functioning properly. This duty is settled by the Central bank. A central
bank is an independent national authority that conducts monetary policy,
regulates banks, and provides financial services including economic
research (Amadeo, 2016). The main goals of the central banks are to
stabilize the countrys currency, and keep unemployment and inflation as
low as possible. The central bank is given the sole domination of issuing
cash within the economy to secure control over the volume of money and
credit which is done through monetary policy. The Central bank is also
known as the governments bank, because all the governments banking
business is done through them such as their current accounts, cash
balances, receipts and payments. They also act as other banks bank
because banks of the country are required to keep a certain proportion of
their deposits with the central bank. By doing this, the cash reserves of all
banks would be ultimately held by the central bank.
The central bank is known to be the lender of last resort. When
individuals are short of funds, the go to the bank. Likewise, when banks
are short of funds they can be loaned from the central bank or their
securities can be discounted. Humphrey & Keleher (2002) state that
acting as LLR Central Bank minimizes the potential risk of disruption of the
whole banking system. This helps save bans from potential fiascos and by
extension saves the financial structure of the country from failure. Another
duty of a central bank is to see that the external value of currency is
preserved. The exchange control system is one such measure.
The collection, compilation and publication of statistical data
relative to banking and other sectors o the company is done by the central
bank. These publications are extremely important. Forecasting agencies
tend to use the central banks statistical information to help in their
forecasting. They would adjust to make sure that their information is in

alignment with the central banks, and they do not have the wealth of
information the central bank is able to accumulate.
MONETARY POLICY
The objective of monetary policy is to preserve the value of money
by keeping inflation low, stable and predictable. Monetary policy is the
Central banks control of the money supply and interest rates to influence
the level of economic activity. The real rate of interest is swayed by
engagements in this policy (Froyen, 2009). Spending of the aggregate
economy is affected by alterations in real interest rates. If interest rates
increase, spending would decrease. Likewise, if interest rates decrease
spending would increase. Some instruments used in monetary policy to
reap changes in interest rates and money supply in the economy are:
open market operations, bank rate policy, reserve system, credit control
policy, moral persuasion and through many other instruments (The
Economic Times, 2016)
The main purpose of monetary policy are:

Manage inflation
Manage Liquidity
To maintain a low and stable rate of inflation.
To promote sustainable economic growth
To reduce employment

A key role of central banks is to conduct monetary policy to achieve

price stability (low and stable inflation), and help manage economic
fluctuations. Through monetary policy the Central bank is able to control
the liquidity in the financial system by setting reserve requirements. This
controls how much cash the private banks of the country can have on
hand therefore controlling how much the banks can lend. They also set
interest rates which banks use when issuing loans, mortgages, bonds and
other lending forms. By increasing interest rates, the growth of the
economy can slow down and thereby prevent inflation. On the other
hand, if they lower rates, they can stimulate growth in the economy and
may prevent recessions. Stimulating the economy too much however can
trigger inflation which goes against one of the central banks ultimate

goals. Inflation is defined as a process of rising prices, or continuously

falling value of money (Frisch, 1990). Constant inflation terminates growth
benefits by levitating costs and prices and in return reduce profits.
Therefore, central banks work hard to be sure to keep interest rates high
enough to prevent it.
CANADAS ECONOMIC ENVIRONMENT
Canadas economy is steadily growing and expanding. In 2016,
Canadas budget was aimed at improving the employment level to help
boost the economy. Their budget also revealed a deficit, sue to high
spending on physical infrastructure, social housing and innovation. Their
aim at improving the employment level became a reality, as the countrys
jobless rate decreased in November 2016 from 7 percent to 6.8 per cent
as a result of 10,700 jobs being created (CBC News, 2016). Part tie
workers increased, while full time workers decreased but overall lowered
the unemployment rate. The majority of the jobs created were in the
services sectors such as finance, leasing, agriculture and real estate and
few jobs in construction and manufacturing.
The economys operations has to be adjusted as oil and other
commodity process has declined. Due to a wildfire earlier this year. On
May 1, 2016, wildfires started southwest of Fort McMurray, Alberta,
Canada. The fires destroyed approximately 2,400 homes and buildings
and left almost 90,000 people displaced and twelve oil sands operations
were shut down (Poloz, 2016). This has resulted in the largest insurance
claim in Canadian history, which was somewhere between 2 and 6 billion
dollars. The wildfire has caused several banks in Canada to lower their
GDP projections as it was projected that the GDP will be slightly negative
for 2016. Oil production as been lost due to the damage in the oil sands
and average of 1.2 million barrels per day for 14 days has been estimated.
CENRAL BANK AND MONETARY POLICY OF CANADA
The Bank of Canada (BoC) is Canadas Central bank. The essential role
of Canada's central bank, is to "promote the economic and financial
welfare of Canada."(Bank of Canada, 2016). The bank is ran by the

governing council. The governing council is made up of the Governor, the

Senior Deputy Governor and four Deputy Governors. They set the policies
of the bank and are responsible for:
The monetary policy
Promoting a safe and efficient financial system
charting the strategic direction of the Bank
The Banks four main areas of responsibility are: (1) influencing the
supply of the currency that circulates in the economy through its
monetary policy while keeping inflation constant and low. (2) to promote
safe, sound and efficient financial systems, within Canada and
internationally, and conducts transactions in financial markets in support
of these objectives. (3) Currency: The Bank designs, issues and distributes
Canadas bank notes. (4) Funds Management: The Bank is the "fiscal
agent" for the Government of Canada, managing its public debt programs
and foreign exchange reserves.
The Bank of Canada has their strategy to achieve the inflation rate. To
achieve the inflation target, the Bank adjusts (raises or lowers) its key
policy rate. If inflation is above target, the Bank may raise the policy rate.
Doing so encourages financial institutions to increase interest rates on
their loans and mortgages, discouraging borrowing and spending and
thereby easing the upward pressure on prices. If inflation is below target,
the Bank may lower the policy rate to encourage financial institutions to,
in turn, lower interest rates on their loans and mortgages and stimulate
economic activity. In other words, the Bank is equally concerned about
inflation rising above or falling below the target. Such an approach guards
against both high inflation and persistent deflation. (Bank of Canada,
2016). Canadas monetary policy framework consists of two key
components that work together: the inflation-control target and the
flexible exchange rate. This framework helps make monetary policy
actions readily understandable, and enables the Bank to demonstrate its
accountability to Canadians.

The Inflation-Control Target

Canadas monetary policy framework has the inflation-control target at
the core. This target is set equally by the Bank of Canada and the federal
government and every five years it is revised. This inflation control target
aids decisions such as the policy interest rate which focuses on preserving
a steady price environment
Target for the overnight rate
The target for the overnight rate is also known as the key policy
interest rate. This interest rate is what the bank assumes should be used
in financial markets for one-day loans between financial institutions. It is
also the target rate for when setting consumer loans, mortgagees and
other forms of lending.
Canadas Flexible Exchange Rate
The exchange rate can be defined as the price of one national
currency, such as the Canadian dollar, expressed in terms of another
currency, for example, the U.S. dollar, expressed in Canadian dollars.
(Bank of Canada, 2012) Canadas flexible exchange rate, or floating dollar,
permits them to chase a self-regulating monetary policy suitable mainly to
Canadas economic conditions. A shield or buffer is provided by creating
slight movements in the exchange rate. This is provided to help absorb
economic shocks that may occur.

AUTHORISED DEPOSIT-TAKING INSTITUTIONS

Authorised Deposit-Taking Institutions (ADIs) is an Australian
government term for a corporation which is authorised under the Banking
Act 1959 to take deposits from customers. (APRA, n.d). the main
elements of an ADI is a corporation that:
Collects money by receiving deposits
Loans money which is repayable on agreed upon terms

 Utilizing money by lending, in which sums are required

examples of ADIs are banks, credit unions and building societies. In
order for the word bank, credit union or building society to be used
in a corporations name, it must meet certain criteria. Banks provide a
variety of financial services throughout economies. Building societies raise
funds through the acceptance of deposits from private individuals, they
provide loans, and payment services. Credit unions provide deposits,
loans, and payment services.