How does the Bank of Canada target rate influence the prime rate in Canada?
When the Bank of Canada raises or lowers its target rate, this is a signal to all banks and lenders in Canada to either raise or lower their prime rate — the base rate used to calculate how much it will cost to borrow money.
Dropping the overnight target rate usually means it's easier to borrow money and a loan will cost less. In this way, a rate reduction encourages more spending and helps stimulate the economy. Increasing the overnight rate has the opposite affect.
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Start Trading TodayWhat is the prime rate in Canada?
Formally called the prime lending rate, this fluctuating number is used to set interest rates on several different types of loans.
Loans tied to the prime rate include:
-
Variable-rate car loans
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Certain types of credit cards (typically balance transfer cards with variable APRs)
As the prime rate shifts up or down, so will the interest you pay if you currently have one of those loans. In addition, banks will offer better or worse deals on new fixed-rate loans, depending on the prime.
Who sets the Canadian prime rate?
While each bank sets its own prime rate, the big five banks — Bank of Montreal (BMO), Bank of Nova Scotia (Scotiabank), Canadian Imperial Bank of Commerce (CIBC), Royal Bank of Canada (RBC) and Toronto-Dominion Bank (TD) — usually have the same number.
That’s because the prime rate is heavily influenced by the BoC’s “policy interest rate.” It’s also known as the “target for the overnight rate,” because that’s what major banks charge each other for one-day loans.
When the BoC raises the overnight rate, it becomes more expensive for banks to borrow money. So they raise their respective prime rates to cover the added costs by pulling in higher interest from you.
When the BoC drops the overnight rate, banks usually lower their prime rates by the same amount — but there are some notable exceptions, as in 2015.
Read More: What is the Bank of Canada interest rate?
Read More: Who wins and loses when the Bank of Canada lowers its overnight rate?
Read More: BoC dropped the overnight rate by 0.5%—making it a golden time for first-time homebuyers
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Get A QuoteCanada prime rate history
| Date | Prime Rate | Target Overnight Rate | Change |
|---|---|---|---|
| Oct 2024 | 5.95% | 3.75% | -0.50% |
| Sept 2024 | 6.45% | 4.25% | -0.25% |
| July 2024 | 6.70% | 4.50% | -0.25% |
| June 2024 | 6.95% | 4.75% | -0.25% |
| April 2024 | 7.20% | 5.00% | 0% |
| March 2024 | 7.20% | 5.00% | 0% |
| January 2024 | 7.20% | 5.00% | 0% |
| December 2023 | 7.20% | 5.00% | 0% |
| October 2023 | 7.20% | 5.00% | 0% |
| September 2023 | 7.20% | 5.00% | 0% |
| July 2023 | 7.20% | 5.00% | +0.25% |
| June 2023 | 6.95% | 4.75% | +0.25% |
| April 2023 | 6.70% | 4.50% | 0% |
| March 2023 | 6.70% | 4.50% | 0% |
| January 2023 | 6.70% | 4.50% | +0.25% |
| December 2022 | 6.45% | 4.25% | +0.50% |
| October 2022 | 5.95% | 3.75% | +0.50% |
| September 2022 | 5.45% | 3.25% | +0.75% |
| July 2022 | 4.70% | 2.50% | +1.00% |
| June 2022 | 3.70% | 1.50% | +0.50% |
| April 2022 | 2.70% | 1.00% | +0.75% |
| March 2020 | 2.45% | 0.25% | -0.50% |
| March 2020 | 2.95% | 0.75% | -0.50% |
| March 2020 | 3.45% | 1.25% | -0.25% |
| October 2018 | 3.95% | 1.50% | 0% |
| July 2018 | 3.70% | 1.50% | +0.25% |
| January 2018 | 3.45% | 1.25% | +0.25% |
| September 2017 | 3.20% | 1.00% | +0.25% |
| July 2017 | 2.95% | 0.75% | +0.25% |
| July 2015 | 2.70% | 0.50% | -0.25% |
| January 2015 | 2.85% | 0.75% | -0.25% |
| September 2010 | 3.00% | 1.00% | -0.25% |
| July 2010 | 2.75% | 0.75% | +0.25% |
| June 2010 | 2.50% | 0.50% | +0.25% |
| April 2009 | 2.25% | 0.25% | -0.25% |
| March 2009 | 2.50% | 0.50% | -0.50% |
| January 2009 | 3.00% | 1.00% | -0.50% |
| December 2008 | 3.50% | 1.50% | -0.75% |
| October 2008 | 4.00% | 2.25% | -0.25% |
| October 2008 | 4.50% | 2.50% | -0.50% |
| April 2008 | 4.75% | 3.00% | -0.50% |
| March 2008 | 5.25% | 3.50% | -0.50% |
| January 2008 | 5.75% | 4.00% | -0.25% |
| December 2007 | 6.00% | 4.25% | -- |
Why does the prime rate go up and down?
The BoC is the nation’s central bank, and its mandate is to “promote the economic and financial welfare of Canada.” To do so, it modifies its targets for the overnight rate in line with the economy's performance and inflation forecasts.
If the economy is booming, the BoC might raise the target for its benchmark interest rate to pull back on people’s spending and keep prices from inflating to astronomical heights. The top banks will likely raise their prime lending rate in the weeks that follow.
When the economy is weakening or inflation dribbles to undesirable lows, the BoC will lower its overnight rate. Exceptional circumstances like the coronavirus pandemic can lead to emergency rate cuts, too.
"The spread of COVID-19 is having serious consequences for Canadians and for the economy, as is the abrupt decline in world oil prices. The pandemic-driven contraction has prompted decisive [action] to minimize any permanent damage to the structure of the economy," the Bank of Canada said in a news release in March 2020.
That was when it slashed the overnight rate to an all-time low of 0.25%, a level last reached during the 2008 financial crisis.
In January 2022, Bank of Canada Governor, Tiff Macklem, announced to reporters that "interest rates will need to increase to control inflation. Canadians should expect a rising path for interest rates."
And they did. The central bank raised interest rates eight times in 12 months, only pausing the hike in March 2023. Rates have gone up twice more since then but have been paused since July, signalling that their efforts to calm inflation is working.
How the Canadian prime rate impacts you
Home equity lines of credit
If you have access to a HELOC, you'll feel the movements in the prime rate most closely.
Rates on those products change in sync with the prime. The adjustable rate on a HELOC might be advertised as "prime plus 1%" or "prime plus one," for example.
The rate on this hypothetical HELOC would have decreased from 7.45% to 6.95%, a few days to a few weeks after the BoC target rate dropped to 3.75%.
Credit cards
Similar to HELOCs, some lower-interest or variable APR credit cards might have an interest rate described as “prime plus 4.50% to 12.75%” or “prime plus 9.99%.”
Auto loans
Variable-rate auto loans shift in line with the prime, and the rate you’ll get on a new fixed-rate loan will change, too.
How much depends on the institution, so it's important to check with your lender when you hear about a prime rate hike or cut.
Mortgages
The two most common types of mortgages in Canada, fixed-rate mortgages and variable-rate mortgages, interact with the prime in different ways.
An active fixed-rate mortgage won’t be affected — that’s what makes them fixed — but the rates for new borrowers usually go higher or lower in step with the prime.
By contrast, the interest rate you pay with variable-rate mortgages tangos directly with the prime rate over the course of the loan. With a five-year variable mortgage, you could be quoted for a rate that looks like "prime -0.45%" — the equivalent of 5.50% (with prime at 5.95% minus 0.45%).
With interest rates this low, Canadians could be motivated to lock-in lower debt costs — finding mortgages, auto loans and other debt products with lower borrowing costs, and help reduce the strain on monthly budgets.
— with files from Romana King
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