3 actions the Bank of Canada can take during a rate announcement

There are three potential actions the Bank of Canada can take during a rate announcement, which can have a significant impact on the Canadian economy.

The three actions the BoC can take include:

Bank of Canada: Rate hike

The BoC could increase interest rates to combat inflation. A hike would raise borrowing costs, potentially slowing down consumer spending and investment but helping to control inflation.

Bank of Canada: Rate hold

The BoC might decide to keep the current rate steady. This decision would indicate that the current monetary policy is adequate, at this point in time, to manage inflation and economic growth without further intervention. It can also indicate that the BoC is maintaining a wait-and-see approach to determine if past monetary policy initiatives have had the desired affect.

Bank of Canada: Rate cut

The BoC could cut its overnight target rate and this could prompt an interest rate cut in prime and mortgage rates. An interest rate cut will usually stimulate economic activity by making borrowing cheaper, encouraging spending and investment.

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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 to banks and other financial firms. This institutional loans help create liquidity — meaning it helps supply money where there is demand. The overnight rate is the same as the target rate and only the Bank of Canada establishes this rate.

How the overnight rate affects the prime rate

Once the BoC establishes the overnight rate, other lenders, such as banks, loan providers, auto financing companies and credit card companies, use the overnight rate to establish their prime rate — the interest rate charged on loans issued to borrowers.

For instance, if the BoC target rate is 4.5%, then the prime rate at a Big 6 Bank would be closer to 6.5%. This doesn't mean that all borrowers will get a loan that charges 6.5% interest. Many lenders will quote interest rates based on prime. For instance, a personal loan provider could offer a customer “prime plus 1%” ( or prime plus one). This means the borrower will pay an interest rate that is 1% higher than the prime rate set by that lender. It also means if the prime rate increases — due to a Bank of Canada rate increase — the borrower will be charged more in interest payments.

How is the target overnight rate determined?

The overnight rate is determined by the rate of inflation and how the economy is performing.

If the economy isn’t growing — if consumers aren’t spending and businesses are faltering — the bank will lower the overnight rate, all else being equal. This reduction in the cost of borrowing should incentivize Canadians to spend more money, borrow at lower rates and boost the overall 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 BoC will raise the interest rate. This makes it more expensive to borrow money, such as mortgages or personal loans. This leads to less spending, and inflation will start to pull back.

The target overnight rate is the principal tool used by the Bank of Canada to control inflation.

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

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Bank of Canada: Rate announcement dates for 2024

The Bank of Canada has a fixed schedule of rate announcement dates, when it announces the current policy and overnight target rate. In 2024, these dates are:

  • Wednesday, January 24
  • Wednesday, March 6
  • Wednesday, April 10
  • Wednesday, June 5
  • Wednesday, July 24
  • Wednesday, September 4
  • Wednesday, October 23
  • Wednesday, December 11

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.

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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 1%.

With the current, July 2024 overnight rate of 4.50%, a “prime plus 1%” HELOC would have an interest rate of 5.50%.

This could mean a difference of hundreds — even thousands — of dollars a month.

Credit cards

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

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.

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Bank of Canada overnight rate history

Changes in Canada's prime rate and overnight rate
Date Prime Rate BoC Overnight Rate Change
July 2024 6.70% 4.50% -0.25%
June 2024 6.95% 4.75% -0.25%
April 2024 7.20% 5.00% --
March 2024 7.20% 5.00% --
January 2024 7.20% 5.00% --
December 2024 7.20% 5.00% --
October 2023 7.20% 5.00% --
September 2023 7.20% 5.00% --
July 2023 7.20% 5.00% +0.25%
June 2023 6.95% 4.75% +0.25%
April 2023 6.70% 4.50% --
March 2023 6.70% 4.50% --
January 2023 6.70% 4.50% +0.25%
December 2022 6.45% 4.25% +0.50%
October 2022 5.95% 3.75% +0.50%
September 2022 5.45% 3.25% +0.75%
July 2022 4.70% 2.50% +1.00%
June 2022 3.70% 1.50% +0.50%
April 2022 2.70% 1.00% +0.75%
March 2020 2.45% 0.25% -0.50%
March 2020 2.95% 0.75% -0.50%
March 2020 3.45% 1.25% -0.25%
October 2018 3.95% 1.50% --
July 2018 3.70% 1.50% +0.25%
January 2018 3.45% 1.25% +0.25%
September 2017 3.20% 1.00% +0.25%
July 2017 2.95% 0.75% +0.25%
July 2015 2.70% 0.50% -0.25%
January 2015 2.85% 0.75% -0.25%
September 2010 3.00% 1.00% +0.25%
July 2010 2.75% 0.75% +0.25%
June 2010 2.50% 0.50% +0.25%
April 2009 2.25% 0.25% -0.25%
March 2009 2.50% 0.50% -0.50%
January 2009 3.00% 1.00% -0.50%
December 2008 3.50% 1.50% -0.75%
October 2008 4.00% 2.25% -0.25%
October 2008 4.50% 2.50% -0.50%
April 2008 4.75% 3.00% -0.50%
March 2008 5.25% 3.50% -0.50%
January 2008 5.75% 4.00% -0.25%
December 2007 6.00% 4.25%

History of Bank of Canada rate policy

Bank of Canada FAQs

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 (aka: target rate)?

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.

— with files from Romana King

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James Battiston Content Specialist

James Battiston has been writing personal finance articles for various websites for the past four years. He has a background in film and TV production, and can often be found consuming far too much coffee.

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