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Updated Jan. 30, 2025
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 10 times with the desire to curb economic activity, reduce demand, and thus curb inflationary tendencies within the economy.
In 2024, Canada's inflation hovered around the 2% target, 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 2024, reducing rates by another 50 basis points (bps).
The decision to cut the lending rate by 25 bps in January 2025 and another 25 bps in March 2025 was a strategic attempt to protect the Canadian economy from the effects of a prolonged trade war with the U.S. Amid this uncertainty, the Bank maintains a cautious stance on the direction of interest rates for the rest of 2025, with BoC governor Tiff Macklem calling the situation "a new crisis" and adding that "the uncertainty alone is already causing harm."
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%. It reversed course in June 2024, cutting the rate by a total of 175 bps by year-end.
The new year brought another rate cut. On Jan. 29, the Bank further reduced the overnight rate by 25 bps to 3%.
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, though food prices have remained a sticking point for many consumers.
However, the era of lower inflation in Canada may soon come to an end. A potential 25% tariff on all Canadian imports by the U.S. could significantly weaken Canada's GDP and the dollar, driving inflation above the Bank of Canada's 2% target. In such a scenario, the central bank would face the critical challenge of curbing inflation while safeguarding economic growth.
Effective Date |
Bank of Canada Overnight Rate |
Change (BPS) |
|---|---|---|
| March 13, 2025 | 2.75% |
-0.25% 
|
| January 30, 2025 | 3.00% |
-0.25%
|
| 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. 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) |
|---|---|---|
| December 18, 2024 | 5.45% |
-0.50%
|
| 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 times of 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 had been on a steady climb starting in 2022 up until 2024. In June 2022, the total CPI was recorded at a historical high of 8.1% (the highest in over two decades), which led to the Bank of Canada making some drastic changes to its monetary policy.
The Bank's decision to implement 10 interest rate hikes between March 2022 and January 2023 helped ease inflation from its peak. By June 2024, the Bank began cutting rates to stimulate the economy, implementing a total of seven cuts by the year's end. As of January 2025, the CPI was 1.9%.
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 steady climbing for two years. 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 1.9% as of January 2025.
| Year | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2025 | 1.9% | TBD | TBD | TBD | TBD | TBD | TBD | TBD | TBD | TBD | TBD | TBD |
| 2024 | 2.9% | 2.8% | 2.9% | 2.7% | 2.9% | 2.7% | 2.5% | 2.5% | 1.6% | 2% | 1.9% | 1.8% |
| 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.
The BoC announced five rate cuts in 2024 – 25 bps in June, July, September, and reductions of 50 bps at both the October and December announcements.
the BoC kicked off 2025 with a 25 bps cut, which it followed up with another 25-bps cut in March, putting the overnight rate at 2.75%. Given how volatile the economy is at the moment (due to the U.S.-Canada trade war), economists are unsure whether the BoC will hold rates or serve more cuts in 2025. Future rate decisions hinge on how the trade war impacts Canada's economy. BoC governor Tiff Macklem noted that the uncertainty around the trade war is "already causing harm." That said, there is a high chance that the rates will continue to go down, as the BoC attempts stimulate the economy. In fact, according to CIBC chief economist Avery Shenfeld, the latest rate cut wouldn't have even been necessary if not for the trade war, stating that the economy was "in pretty good shape."
Find answers about questions you may have about the Bank of Canada.
The current Bank of Canada overnight rate is 3%. The current prime rate offered by banks is 4.95%.
The last few Bank of Canada rate decisions brought the overnight rate down to 2.75% 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 2.25% by the middle of 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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