Nov. 10, 2022
As Canada’s central bank, the Bank of Canada ensures that your dollar gets its maximum value by keeping inflation low and the economy stable.
The decisions the bank makes affect how you go about spending your money. It also affects how businesses set their prices.
When the bank lowers interest rates, it means that you can borrow money from lenders more easily, encouraging you to spend more. When it raises rates, you tend to spend less.
When you spend less money, businesses earn less profit, so they are motivated to bring down their prices. Eventually, a balance will be reached where consumers and businesses are spending at a rate that keeps the economy moving forward while maintaining a lower cost of living.
What is the Bank of Canada?
The Bank of Canada is responsible for promoting “the economic and financial welfare of Canada.” As Canada’s national bank, it accomplishes this through a variety of ways.
Monetary policy: The policies set out by the bank help circulate money and stabilize inflation. Much of this is accomplished by setting the policy interest rate.
Financial system: The bank ensures that financial systems operate smoothly and that transactions performed within these are ethical and secure.
Currency: The physical money we use every day is designed and distributed by the bank.
Funds management: The bank manages the country’s foreign exchange reserves and public debt programs.
Retail payments supervision: The bank supervises payment service providers for retail businesses.
What is the Bank of Canada interest rate?
Today’s Bank of Canada interest rate is 3.75 per cent.
The Bank of Canada establishes its policy interest rate, or overnight rate, as a means to control inflation.
The rate set by the bank establishes the lending rate used by many other financial institutions. It affects the interest rate of things like mortgage and lines of credit used by your personal bank.
The higher it costs for banks to lend and borrow money between themselves, the higher you’ll pay in interest when borrowing. As the overnight rate goes down, you can expect to pay less in interest as well.
What is the target overnight rate and how is it determined?
The target overnight rate is determined by the rate of inflation and how the economy is performing.
The overnight rate refers to the cost for businesses and banks to borrow money and lend money to each other between business days.
If the economy isn’t growing — if consumers aren’t spending and businesses are faltering — the bank will lower the interest rate. This incentivises Canadians to spend more money, and even borrow at lower rates therefore boosting the economy.
If inflation is rising because the economy is growing faster than it should be, this raises red flags. In an effort to bring down costs, the bank raises the interest rate. This makes it more expensive to borrow money for loans, such as mortgages. This leads to less spending, and inflation will start to pull back.
The target overnight rate is the foundation of the Bank of Canada’s efforts to control inflation.
Every time you use your debit or credit card — every time you buy something with cash — the money you spend goes to and from your bank and other financial institutions. Sometimes more money flows out of a bank than they receive, sometimes less.
Banks are in the business of making money, so they want to ensure all affairs are balanced in the overnight market. In order to balance the money, banks can borrow money from one another or from the Bank of Canada at the established bank rate.
If the economy isn’t growing at a healthy pace, the Bank of Canada can lower interest rates to encourage lending and purchasing. If the economy is growing too quickly, it raises the interest rate to slow things down.
Impact of lower and higher interest rates
Lower interest rates
- Lower interest rates on loans like mortgages and lines of credit
- Less interest on savings
- People spend more money
- Economy grows
Higher interest rates
- Higher interest rates on loans and mortgages
- People and businesses borrow less money
- People save more money and spend less
- Economy slows
Upcoming announcement dates
The Bank of Canada has a fixed schedule of announcement dates, on which they announce the policy rate.
For 2022: Wednesday, Dec. 7
- Wednesday, Jan. 25
- Wednesday, March 8
- Wednesday, March 12
- Wednesday, June 7
- Wednesday, July 12
- Wednesday, Sept. 6
- Wednesday, Oct. 25
- Wednesday, Dec. 6
How does the Bank of Canada affect mortgage rates?
When you take out a mortgage, you’re borrowing money from a financial institution to fund the purchase of your home.
The more expensive it is for your bank to get the money to loan to you, the higher your interest rate is going to be.
When the Bank of Canada raises its overnight rate, financial institutions raise their rates to cover the costs of borrowing. When the bank lowers its rate, banks pay less to borrow money, so they will also charge you less.
When you take out a mortgage, the interest rate includes the base lending amount (the Bank of Canada’s overnight rate) in addition to your financial institution’s fees. The latter includes things like administrative costs, insurance and profit for the bank.
If you’re locked into a fixed-rate mortgage, the change in the overnight rate will not affect you — unless you’re nearing your renewal date. If you are renewing, you might find yourself paying more (or less) for your mortgage than you previously had.
If you have a variable-rate mortgage, you are much more vulnerable to changes in the overnight rate. As with any mortgage, the amount you pay each month goes to both the principal and the interest of your loan.
If your mortgage is capped and the bank increases its overnight rate, you will pay the same amount of money each month with a variable-rate mortgage, but now more money will be going to the interest payment rather than the principal.
If your mortgage is uncapped, then you will see the total cost per month rise.
The Bank of Canada’s impact on the housing market
Because the Bank of Canada is instrumental in determining the cost of mortgages, it also directly impacts the country’s housing market.
When interest rates are low, more people will be interested in borrowing money to purchase a home. They can also afford to borrow more money. This creates a seller’s market, as demand is high and there will be many potential buyers for a single home. Because of this sellers can set higher prices for their homes, and buyers will be willing to pay it.
When interest rates are high, fewer individuals will want to take on the additional costs of borrowing money. When people want to sell their home, they’ll find that high prices are a deterrent to the smaller pool of prospective buyers. This drives down the price of buying a home, creating a buyer’s market.
Other areas impacted by the BOC’s overnight rate
Home Equity Lines of Credit (HELOC)
HELOCs are tied directly to the Bank of Canada’s overnight rate. Often you will see a HELOC’s rate advertised as “prime plus 1%” or “prime plus one,” for example. This means that the percentage you pay in interest is the bank’s overnight rate, plus an additional one per cent.
With the old rate of 3.25%, a “prime plus 1%” HELOC would have an interest rate of 4.25%. With the new overnight rate of 3.75%, the HELOC interest rate is now 4.75%.
This could mean a difference of hundreds — even thousands — of dollars a month.
Some credit cards offer interest rates that are tied to the overnight rate as well. These are often lower-interest or variable APR (annual percentage rate) credit cards. You might see them advertised as offering rates such as “prime plus 4.50% to 12.75%” or “prime plus 9.99%.”
Auto loans function in much the same way as mortgages. New fixed-rate loans are in line with the prime rate, and variable-rate loans will shift with the prime rate’s movements.
Be sure to check with your auto loan lender to determine how much impact changes in the prime rate will have on you.
Overnight rate versus the prime rate
The Bank of Canada establishes its target for the overnight rate — the interest that it charges for lending money. It uses this as a means to help stabilize the economy.
The prime rate is the interest rate that the majority of banks use to set their own lending rates. The big five banks usually have the same prime rate.
For a loan, you might see the interest set at “prime plus 1%” or “prime plus one,” for example, which indicates that, on top of the bank’s prime rate, you will pay an additional one per cent in interest on a loan.