The Best Current Mortgage Rates in Canada

About the Bank of Canada

What is the Bank of Canada?

The Bank of Canada is the nation’s central bank established to regulate credit and currency of the country, to control and protect the external value of the national monetary unit and to promote the economic and financial welfare of Canada. Headquartered in the country’s capital, Ottawa, the Bank of Canada was chartered in 1934 under the Bank of Canada Act. The central bank’s purpose is to create and manage Canada’s monetary policy, ensure, and promote a sound financial banking system, and issue Canadian banknotes. The Bank of Canada also provides banking services and money management for the government, and loans money to Canadian financial institutions.

Bank of Canada’s history

The bank was originally chartered as a privately owned corporation to ensure the bank would be removed from any undue political influence.

On March 11, 1935, the Bank of Canada began operations, following the granting of royal assent to the Bank of Canada Act.

In 1938, under Prime Minister William Lyon Mackenzie King, the bank was legally designated a federal Crown corporation.

The government at the time appointed a board of directors to manage the bank, under the leadership of a governor. Each director swore an oath of "fidelity and secrecy" before taking office.

In 1944, the Bank of Canada then became the sole issuer of legal tender banknotes in Canada.

Over time, the Bank of Canada has evolved to assist with inflationary and interest rate policies.

How does the Bank of Canada differ from other Canadian banks?

The Bank of Canada is a Crown corporation, established to create and monitor monetary policy, as well as issue bank notes. It is run by a Board of Governors and acts as an economic lever of the Canadian economy to ensure sound financial banking systems and policies are in place.

Other banks in Canada are for-profit institutions which deal with consumer or large business customers for lending, borrowing, and financing issues. Canadian banks provide services to customers that also provide investment and savings opportunities, and some have other divisions that sell insurance and mortgage products. These banks do not set monetary policy and rely on the Bank of Canada for certain lending rates.

Private banks also work as traders and underwriters of government and corporate debt.

Bank of Canada’s role and responsibilities

The Bank of Canada has many roles in Canadian economic life such as issuing monetary policy and bank notes. It has evolved, however, as a major player in inflation fighting. The Bank of Canada aims to keep inflation at the 2% midpoint of an inflation-control target range of 1% to 3%. The inflation target is expressed as the year-over-year increase in thetotal consumer price index (CPI).

Between March 2022 and July 2023, the Bank of Canada raised its policy interest rate at least 10 times with the desire to curb economic activity, reduce demand and thus curb inflationary tendencies within the economy.

In 2024, Canada's inflation is hovering around the 2% target. As of October, inflation is at 2%, an increase from the previous month, but overall, it was an indication the economy was stabilizing. However, several significant challenges have emerged since then, including rising unemployment, a weakening Canadian dollar, and tariff threats from the U.S. To guard against the economy becoming too weak, the Bank introduced a stimulus measure in December, reducing rates by another 50 bps.

The most recent cut was part of a cautious approach throughout the year, with rate cuts implemented in June, July, September, and October. The central bank continues to monitor key economic indicators closely as it works to mitigate the impact of these challenges and prevent further economic weakening.

What is the BoC overnight rate?

The Bank carries out monetary policy by influencing short-term interest rates. It does this by adjusting the target for the overnight rate on eight fixed dates each year. The overnight rate is the interest rate at which a bank lends or borrows funds from another institution in the overnight market. In Canada, the overnight rate is the interest rate the central bank sets to target monetary policy.

How does the BoC determine their overnight rates?

If the economy is struggling to grow, it could pull inflation significantly below 2%. In response, the Bank might lower the policy rate so that other interest rates across the economy go down. This means:

• People and businesses pay lower interest on loans and mortgages and earn less interest on savings.
• With lower rates, people tend to spend more, boosting the economy.

But if the economy is growing too fast, it could lead to rising inflation. So, the Bank raises the policy rate, which means:

• People and businesses pay higher interest on loans and mortgages. This discourages them from borrowing, reduces their spending and puts the brakes on inflation.
• With higher rates, people tend to save more and spend less, slowing down the economy.

Effects on overnight rates changes

The overnight rate indirectly affects mortgage rates. As the overnight rate increases, it is more expensive for banks to settle their accounts, so to compensate they will raise longer-term rates. It can also affect savings rates in the same manner.