Canada’s prime rate has moved significantly over the past 70 years.
Prime rate reached an all-time high of 22.75% in August 1981. That occurred as the Bank was frantically hiking interest rates to control runaway inflation, which was having severe consequences on the country’s economy. This resulted in record-high interest rates for borrowers. Many homebuyers faced rates more than 20% on their mortgages.
In contrast, Canada’s prime rate hit a record low of 2.25% in April 2009. This came during the height of the Financial Crisis, when the Bank of Canada quickly dropped its lending rates to near-zero in an effort to stimulate the faltering economy.
The longest period that prime rate remained unchanged occurred between September 2010 and January 2015, when prime rate sat at 3.00%.
Since the dawn of inflation targeting in 1991, the biggest increase to prime rate was 4.25 percentage points. That occurred over a 15-month period from December 2013 to March 2015.
The average rate-hike cycle since 1991 has resulted in rates that peaked about 2.30 percentage points above the low that preceded them. So, if you’re a variable-rate mortgagor, assume at least two percentage points as your potential rate risk.
Many point to the extreme increases in the late 1970s and early 1980s as a warning of what’s possible. But that was a different time, a time well before inflation targeting (which anchors rates lower), before stagnant growth and before North America became energy independent. In the world we now live in, debt-gorged economies could no longer withstand double-digit interest rates. Nor could governments with their billions in debt service obligations.
The country’s Big Six banks all regularly publish forecasts for prime rate, generally as far as a year or two into the future.
Based on an average of the latest bank forecasts, current expectations for Canada’s prime rate are as follows:
Forecasts for prime rate are also tracked by Bloomberg, which publishes a consensus of major economists’ prime rate expectations, as well as implied future rates from the Overnight Index Swaps (OIS) market.
OIS are derivatives used by traders to bet on the future direction of the Bank of Canada’s overnight target rate. As of this writing, prices of future OIS imply a flat prime rate for at least a year.
As noted above, prime rate almost always changes when the Bank of Canada raises or lowers its key interest rate. The BoC delivers eight scheduled interest rate decisions per year.
The first Bank of Canada rate meeting in 2021 is scheduled for: Wednesday, January 20.
That said, the Bank of Canada can also hold emergency rate meetings in times of economic crisis. It did this last in the spring of 2020 during the COVID-19 pandemic. The BoC also had emergency meetings during the Financial Crisis of 2008. In both cases, the Bank’s emergency rate cuts resulted in reductions to Canada’s prime rate.
These are the rest of the scheduled dates for interest rate announcements in 2021:
*Monetary Policy Report published.
Prime rate typically follows a parallel path with the Bank of Canada’s overnight target rate. But this isn’t always the case.
In 2015, for example, Canada’s big banks chose not to pass along the BoC’s full rate cuts. Banks ended up “pocketing” 20 bps of the BoC’s 50 bps of rate cuts.
Sometimes a lender moves its own prime rate unilaterally, as TD Canada Trust did in November 2016. The bank decided to hikes its “mortgage prime rate” by 15 bps, essentially forcing thousands of its existing variable-rate customers to pay 15 bps more on their rate despite no Bank of Canada rate change.
The following graph shows the movements of Canada’s prime rate over the last 40+ years.
Prime rate is the base interest rate used by most financial institutions to price floating-rate lending products. This includes things like variable-rate mortgages, personal and home equity lines of credit (HELOCs), commercial loans and credit cards.
Each lender sets its own prime rate, but they usually match the benchmark prime rate calculated by the Bank of Canada. More on that below.
Canada’s prime rate last changed in March 2020 and is currently 2.45%.
The country’s official prime rate is calculated by the Bank of Canada using a mode average of the Big 6 banks’ individual prime rates.
This rate is published by the BoC on a weekly basis, but typically only changes following adjustments to the central bank’s overnight target rate.
For example, if the Bank of Canada cuts its key lending rate, the big banks typically announce reductions to their individual prime rates not long after the BoC decision.
If a majority of the big banks adjust their individual prime rates, Canada’s official prime rate—or benchmark rate—will also change accordingly
Most lenders will quote their variable (or “floating”) rates as either a premium or a discount in relation to prime rate.
For example, you’ll generally see closed variable rates advertised at a discount, like “prime – 0.60%.”
Open variable rates, which allow the borrower to repay the loan as quickly as they want without penalty, are typically priced much higher and are therefore quoted at a premium to prime rate, such as “prime + 1.50%.” This goes for most HELOCs as well.
As the prime rate changes, a floating-rate borrower’s interest rate fluctuates. But that doesn’t necessarily mean their monthly payments will change.
In the case of variable-rate mortgages, borrowers can get a fixed-payment variable rate. That means when prime rate rises, the monthly payment remains the same, but the amount of the payment going towards interest increases. If interest rates fall, someone with a fixed-payment mortgage will see the interest portion of their payment decline, while more will go towards reducing the principal.
By contrast, someone with an “adjustable-rate” mortgage will have payments that move up and down with prime rate. In other words, the amount of principal being paid never decreases, regardless of what prime rate does. That keeps your amortization (the time required to pay off your mortgage) on track.
The number one factor driving changes to prime rate is inflation expectations. The Bank of Canada is required to set monetary policy to achieve a target inflation rate of 2%. It typically does this by increasing or decreasing its overnight rate.
When its economic models suggest inflation is falling materially below the 2% target, the Bank of Canada will cut its overnight rate to stimulate more borrowing, economic activity and inflation. That generally leads to a lower prime rate.
When the BoC expects inflation to meaningfully exceed the 2% target, it typically hikes its overnight rate, leading to a higher prime rate.