Video: How the Bank of Canada’s interest rate affects you
What happens when the Bank of Canada raises or lowers interest rates?
If the economy is struggling to grow or experiencing a shock, as it did during the COVID-19 pandemic, the BoC can slash interest rates to help boost economic activity. When the overnight rate falls, people and businesses pay lower interest on new and existing loans and mortgages, and they earn less interest on savings. This generally leads them to spend more, which in turn helps strengthen the economy.
Conversely, an economy that is growing too quickly can lead to high levels of inflation. In this scenario, the BoC might raise the overnight rate. Lenders subsequently raise interest rates for loans and mortgages, which discourages people and businesses from borrowing, reduces overall spending and helps bring inflation under control.
During normal economic times, the BoC typically increases its benchmark rate in increments of no more than 0.25%. Prior to its April 2022 rate announcement, the Bank hadn’t raised the overnight rate by more than 0.25% in one shot since May 2000—more than 20 years ago.
How often does the Bank of Canada review interest rates?
In 2020, to help Canadians anticipate and prepare for changes in interest rates, the BoC introduced an annual schedule of eight fixed policy-rate announcements. On these specified dates, it reports whether or not it is changing the overnight rate. In special circumstances, such as national emergencies, it may announce rate changes on other non-specified dates—just as it did on March 13 and 27, 2020, in response to COVID-19.
Historically, the overnight rate has fluctuated based on large-scale events affecting the economy. On the heels of the 2008 financial crisis, the rate fell from 4.5% to 0.25%. Between 2010 and 2018, it gradually increased to 1.75%. It then fell sharply in early 2020 in response to the pandemic.
What is the prime rate?
Not to be confused with the BoC’s policy interest rate, the prime interest rate is a percentage used to set interest rates on several different types of loans, including lines of credit, student loans and variable-rate mortgages.
Each of Canada’s five major banks—Bank of Montreal (BMO), Bank of Nova Scotia (Scotiabank), Canadian Imperial Bank of Commerce (CIBC), Royal Bank of Canada (RBC) and Toronto-Dominion Bank (TD)—can set their own prime rate, but they tend to use the same rate. The prime rate is currently at 6.7%
How is the prime rate set?
When the Bank of Canada increases or slashes its overnight rate, prime rates typically adjust by a similar amount. Most lenders reset their prime rate almost immediately after the BoC changes its benchmark rate.
What about the idea of a blended mortgage? Knowing rates are going to rise, an option is to talk to your bank about blending the current rate with the rate you are paying and locking in for the next 5 years. It’s a good way to extend your lower rate payment longer especially if your mortgage was coming up for renewal in the next year or two.
Very excited to finally see savings accounts (1.7%) and GIC rates (3.1% for a 1-year term) on the rise. Obviously locking in a 5-year term now makes no sense so I’m wondering what MoneySense suggests a good strategy would be for savers?
Great question! Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.
This was really informative.
Where do you suggest people start investing their money?
Inflation in priced of commodities without justified increase in value
Our protective TAX PAID PUBLIC SERVANTS must by fiduciary duties of paid care,
step in and control the fair profit on commodities, not the current theft level criminally conspired outrageous unearned gain made by unjustly raising commodities such as housing costs which have no bearing on the same value received before inflation.
A home should cost materials plus labour costs,
plus a Government regulated fixed profit percentage fixed to protect citizens as we pay taxes to receive.
We do not pay our Tax paid Bank of Canada employees to feed the insane greed of European builders by agreeing to theft level profits, and then support and promote these thieving predators by increasing borrowing rates instead of clamping down as we pay you to do regulating Milk Board type controls of prices.