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The Bank of Canada’s benchmark interest rate can have an impact on everything from your savings account to your mortgage and student loan.
The Bank of Canada’s benchmark interest rate, also called the overnight rate or policy interest rate, is the bank’s target rate for overnight borrowing between Canadian banks. Each day, consumers and businesses conduct about 30 million financial transactions, making and receiving payments on debit and credit cards, using cheques and e-transfers, moving funds from one bank to another. The banks facilitate this movement by borrowing or lending money to each other every night, usually at the overnight rate.
Although consumers can’t borrow money at the Bank of Canada’s overnight rate, this rate is a key driver of rates on other financial products like mortgages, guaranteed investment certificates (GICs), savings accounts and so forth.
The overnight rate is also known as the policy interest rate because the Bank of Canada uses it to implement monetary policy. Eight times a year, the bank announces its decision to increase or decrease the rate or leave it unchanged. When the economy is struggling, rates are often lowered to stimulate economic activity. The bank started raising rates in March 2022 in an effort to control inflation.
Example: “Robin was shopping for a new home. When she heard the Bank of Canada was expected to announce a rate increase, she applied for a mortgage pre-approval to lock in the current rate.”
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