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Updated Dec. 12, 2024
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.
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.
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.
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.
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.
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:
But if the economy is growing too fast, it could lead to rising inflation. So, the Bank raises the policy rate, which means:
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.
In 2020, as the COVID-19 pandemic was raging, Canada saw its inflation rate hit a low of 0.72%. The next year, due to high labour demand, supply chain slowdowns, and ultimate price increases, inflation began to rise steadily.
The worldwide phenomenon of high inflation affected many central bank policy changes. In 2022, the Bank of Canada began a policy of raising its overnight rates to curb inflation.
From March 2022 to July 2023, the Bank of Canada raised rates 10 times to a 22-year high of 5% before finally cutting rates in 2024 starting June.
By September 2024, the bank had cut the policy rate by 150 basis points. The Bank’s overnight rate as of Oct. 23, 2024, stands at 3.75%.
The chart below shows that historical overnight rate trends remained quite low – getting to as low as 0.25% in April of 2020. The inflation rate peaked in June of 2022, at a rate of 8.1%.
Since then, inflation rates have been declining steadily as oil and gas have come down, and many supply chain issues have eased. In Canada, food prices have remained a sticking point for many consumers.
While the overnight rate has come down to 3.25% from a high of 5% (in June 2023), the trend of lower inflation foretells the possibility of a further decrease in rates soon, should the lower inflation trend remain.
And while borrowing costs remain high compared to just three years ago, the housing market is showing signs of heating up again thanks to the rate cuts.
Effective Date |
Bank of Canada Overnight Rate |
Change (BPS) |
|---|---|---|
| December 12, 2024 | 3.25% |
-0.50% 
|
| October 24, 2024 | 3.75% |
-0.50%
|
| September 5, 2024 | 4.25% |
-0.25%
|
| July 25, 2024 | 4.50% |
-0.25%
|
| June 6, 2024 | 4.75% |
-0.25%
|
| July 13, 2023 | 5.00% |
0.25% 
|
| June 8, 2023 | 4.75% |
0.25%
|
| January 26, 2023 | 4.50% |
0.25%
|
| December 8, 2022 | 4.25% |
0.50%
|
| October 27, 2022 | 3.75% |
0.50%
|
| September 8, 2022 | 3.25% |
0.75%
|
| July 14, 2022 | 2.50% |
1.00%
|
| June 2, 2022 | 1.50% |
0.50%
|
| April 14, 2022 | 1.00% |
0.50%
|
| March 3, 2022 | 0.50% |
0.25%
|
| March 27, 2020 | 0.25% |
-0.50%
|
| March 16, 2020 | 0.75% |
-0.50%
|
| March 4, 2020 | 1.25% |
-0.50%
|
| January 1, 2019 | 1.75% |
1.75%
|
*As of 2021, a change takes effect the day after its announcement.
The prime interest rate, also known as the “prime rate,” is the interest rate commercial banks charge their most credit-worthy business customers for things like variable rates and lines of credit. It is a baseline rate upon which all floating rate loans are negotiated (for example, prime 6.70%). The prime rate is set by financial institutions in a competitive fashion.
The rate is individually set by each bank, but when the prime rate is moved by one bank, other banks tend to follow and use the same rate within a day or two. The prime rate tends to be set based on what the Bank of Canada sets their overnight target rate at.
After the Bank of Canada has set its overnight rate and banks have set their prime rates, mortgage rates will rise and fall. When the prime rate in Canada goes up or down, your mortgage rate will go up or down by the same amount. Variable mortgages usually come with a lower rate than fixed-rate mortgages, however there’s always a risk the rate could go up (or down) during your mortgage term.
Effective Date |
Prime rate of chartered banks |
Change (BPS) |
|---|---|---|
| October 30, 2024 | 5.95% |
-0.50%
|
| September 11, 2024 | 6.45% |
-0.25%
|
| July 31, 2024 | 6.70% |
-0.25%
|
| June 12, 2024 | 6.95% |
-0.25%
|
| July 19, 2023 | 7.20% |
0.25%
|
| June 14, 2023 | 6.95% |
0.25%
|
| February 1, 2023 | 6.70% |
0.25%
|
| December 14, 2022 | 6.45% |
0.50%
|
| November 2, 2022 | 5.95% |
0.50%
|
| September 14, 2022 | 5.45% |
0.75%
|
| July 20, 2022 | 4.70% |
1.00%
|
| June 8, 2022 | 3.70% |
0.50%
|
| April 20, 2022 | 3.20% |
0.50%
|
| March 9, 2022 | 2.70% |
0.25%
|
| April 1, 2020 | 2.45% |
-0.50%
|
| March 18, 2020 | 2.95% |
-0.50%
|
| March 11, 2020 | 3.45% |
-0.50%
|
Source: Bank of Canada
Inflation produces a double-edged sword that targets the same thing. During inflation, the costs of goods and services rise and at the same time consumer purchasing power diminishes. Economists and the Bank of Canada measure inflation by looking at the average price of a “basket” of selected goods and services.
That basket is made up of goods and services that consumers typically buy such as food, transportation, clothing, recreation, housing, and more is known as the Consumer Price Index (total) or CPI.
Measuring the cost of living by looking at how the CPI rises or falls is how the Bank of Canada determines the rate of inflation. The Bank of Canada has set a target to keep inflation at the 2% midpoint of an inflation-control target range of 1 to 3%.
Total Consumer Price Index (Historical inflation rates):
Inflation has been on a steady climb starting in 2022 until this year. In June 2022, CPI total was recorded at a historical high of 8.1% (highest in over two decades), which led to the Bank of Canada making some drastic changes to its monetary policy.
After 10 interest rate hikes, the Bank of Canada has helped ease inflation from its peak to a total consumer price index rate of 1.6% as of September 2024.
Seeing as inflation has trended lower, the BoC also updated its monetary policy. After maintaining the overnight rate at a 22-year high of 5% in June 2023, the BoC implemented multiple rate reductions, totaling a 200-basis point cut by December 2024, bringing the overnight rate to 3.25%.
The higher inflation seen in Canada, and worldwide, was a result of a robust labour market and a slowdown in supply chains, which led to higher prices.
Up until 2024, inflation had been on a steady climb starting in 2022. After 10 interest rate hikes, the Bank of Canada has helped ease inflation from its peak of 8.1% to a total consumer price index rate of 2% as of October 2024.
| Year | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2.9% | 2.8% | 2.9% | 2.7% | 2.9% | 2.7% | 2.5% | 2.5% | 1.6% | 2% | ||
| 2023 | 5.9% | 5.2% | 4.3% | 4.4% | 3.4% | 2.8% | 3.3% | 4% | 3.8% | 3.1% | 3.1% | 3.4% |
| 2022 | 5.1% | 5.7% | 6.7% | 6.8% | 7.7% | 8.1% | 7.6% | 7.0% | 6.9% | 6.9% | 6.8% | 6.3% |
| 2021 | 1.0% | 1.1% | 2.2% | 3.4% | 3.6% | 3.1% | 3.7% | 4.1% | 4.4% | 4.7% | 4.7% | 4.8% |
| 2020 | 2.4% | 2.2% | 0.9% | -0.2% | -0.4% | 0.7% | 0.1% | 0.1% | 0.5% | 0.7% | 1.0% | 0.7% |
Source: Bank of Canada
Through the last couple of years since inflation began to rise, Canada’s economy has remained relatively strong and avoided a recession – so far.
Real gross domestic product (GDP) increased 0.4% in the first quarter of 2024, after posting no change in the fourth quarter of 2023 (revised down from 0.2%). In Q1, higher household spending on services was the top contributor to the increase in GDP, while slower inventory accumulations controlled overall growth.
Here at home, the BoC has announced five rate cuts in 2024 – 25 basis points in June, July, September, and 50 basis points in October and December. Economists agree that the BoC will serve more rate cuts in 2025, but only time will tell.
Find answers about questions you may have about the Bank of Canada.
The current Bank of Canada overnight rate is 3.25%. The bank has reduced the overnight rate by 150 basis points this year, bringing the rate down from its historical high of 5%. The current prime rate at banks 5.45%.
The last few Bank of Canada rate decisions brought the overnight rate down to 3.25% from a historical high of 5.0%. Economists predicted these decreases given inflation had been tracking downwards for months.
Without a crystal ball, it is difficult for anyone to predict where interest rates will go. The Bank of Canada says inflation is likely to stay close to the 2% mark. If the trend holds, rates may come down even further. Economists predict the overnight rate will dip down to 2.75% by the start of the second half of the year.
The next scheduled date for a rate announcement is as follows:
Joel Kranc is a freelance writer and content provider who has worked with RATESDOTCA since 2019. He holds an MA in political science from the University of Toronto and a film certificate from New York University.
He has been published in and worked for such companies as CNN, Rogers Media, Institutional Investor Magazine, The Globe and Mail, Infrastructure Investor, BenefitsPRO Magazine, Global Finance Magazine, With Intelligence, the CPP Investment Board, Hospitals of Ontario Pension Plan, and many more financial services and industry publications.
He is the author of "Retirement Planning in 8 Easy Steps," which, when released in 2015, was No. 11 on the Publisher's Weekly US Bestseller List for Business and Finance, beating out Mark Cuban's "How to Win at the Sport of Business."
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