Definition: The Bank of Canada’s target rate, also known as the key interest rate or key policy rate, is the specific interest rate the Bank wants major financial institutions to follow when lending one-day (overnight) funds to one another. It serves as a foundation for setting other interest rates within Canada, impacting everything from mortgages to credit lines.

How the target rate works

The target rate is the backbone of Canada’s financial system. By setting this rate, the Bank of Canada aims to guide banks in their short-term (overnight) lending activities, ensuring a stable foundation for the economy. When banks follow this rate in their overnight transactions, it creates a stable environment for other interest rates, affecting how much Canadians pay when they borrow.

Why it matters for borrowers

For everyday Canadians, changes in the target rate can mean a lot. If the target rate goes up, borrowing costs—like mortgage payments or credit lines—often rise, making it more expensive to take on new loans. On the other hand, when the target rate drops, borrowing costs tend to fall, which can be a welcome relief for those with variable-rate products.

For example, variable-rate mortgages often adjust in line with the Bank’s rate changes, impacting monthly payments. Even if you have a fixed-rate mortgage, changes in the target rate can still influence overall lending conditions and may affect the rates on new loans.

Why the Bank announces changes on fixed dates

Since November 2000, the Bank of Canada has used eight set dates each year to announce whether it will adjust the target rate. These “fixed announcement dates” bring consistency and transparency to the market. Banks, businesses, and Canadians alike can prepare for any possible changes in borrowing costs, helping avoid surprises. It’s a structured way for the Bank to manage expectations and provide a stable framework for financial planning.

The bigger picture: how the target rate shapes the economy

By raising or lowering the target rate, the Bank of Canada can encourage or cool down economic activity. When it raises the rate, borrowing costs rise, which can slow spending and ease inflation. Lowering the rate has the opposite effect, making it easier and cheaper to borrow, which can boost economic growth. It’s a balancing act that helps keep the economy stable and inflation under control.

Last modified: November 12, 2024