How does the Bank of Canada set the interest rate and how does the Bank Rate affect the mortgage interest rates?

These are all good questions!  If you are a little confused, so are many others.  It's somewhat complicated and I'll try to explain to you the different rates and how they affect your interest rate.

There is the Bank Rate | Target Rate | Bank of Canada Prime Rate | Prime Rate | no wonder it's so confusing!  Let's look at one at a time.

Bank Rate or the Target Rate

The Bank of Canada's target rate is the interest rate that the Bank of Canada set for the major financial institutions to use when lending one-day (overnight) funds to each other.   As of May 3, 2011 the Bank Rate or Target Rate was 1.00%

This little image on the right should show the current bank rate:

You will read in the news about this rate when the Bank of Canada makes a rate announcement.  The target rate therefore sets the "overnight lending rate" and is often referred to as the Bank's key interest rate or key policy rate or the target rate.

Changes in the target rate influence other interest rates as well, such as those for consumer loans and mortgages.

In November 2000, the Bank introduced a system of eight "fixed" dates each year on which it announces whether or not it will change the target rate.

Strictly speaking, the Bank Rate and the Target Rate and the Bank of Canada Prime Rate are all the same, it's only the Prime Rate that is different, keep reading!

Prime Rate

This is the rate that you are most commonly are interested in following, because this rate is what affects the rate you pay.

The major banks in Canada typically charge their best customers about 2% above the Bank of Canada "Bank Rate" or "target rate" for an unsecured line of credit.  As of April 19th, the Target rate was 1.00% which means that the Prime Rate that we consumers see most often is now 3.00%

The Prime Rate is also a reference interest rate that is used as a basis for quoting other lending rates, such as variable-rate mortgages, lines of credit and fixed mortgage rates.

In previous years and decades the Prime Rate was the rate at which financial institutions lent money to their best customers.  This is no longer necessarily the case. Now financial institutions will lend at prime or even less than prime to new or existing customers to obtain or keep their business.

Bloomberg news has a fabulous interactive graph that you can see different historical views of prime rates and this can be seen here.

More information on rates

Bank Prime Rate means "best" and this is the rate that banks charge their absolute best customers for loans, which is usually only other lending institutions.

Changes in the Bank of Canada prime rate influence changes in other interest rates, including variable interest rate mortgages. This "bank rate" rate fluctuates based on economic conditions.

Some mortgage companies offer interest rates starting at Prime minus .1% (or more) as an incentive to borrow from them!  These are known as "SUB PRIME" Mortgages and we know what happened in the US when too many sub-prime mortgages were given out in the mid 2000's   One of the dangers with sub-prime mortgages is when they come due too early in the mortgage term and rates have increased, it's difficult to make the change to much larger payments. Read more about Sub-Prime Mortgages

For example, see the
Royal Bank Prime Rates
Bank of Canada Prime rates found here

Partial Source: Bank of Canada

Latest Overnight Rate Forecast

The Bank of Canada's overnight target has a direct impact on variable mortgage rates.

Bank	2011	2012
BMO	2.00	3.50
CIBC	2.00	2.25
NBC	2.00	2.75
RBC	2.00	3.00
Scotia	1.50	2.25
TD	2.00	3.00
Year-end Average	2.00	2.75
Chg vs Today	+1.00	+1.75

(All figures are rounded to the nearest 1/4 point increment.)

You may continue to read the information on this page, and maybe you want to read about rates back in the mid 2000's

• If you want all the actual values of rates from 1979, I have them, and would be pleased to E-mail them to you on request. Click here to request that I send you the rates.
• I also have the average single family residential property prices going back to 1985
• You may also read about and see another graph of the mortgage interest rates

Does the Bank of Canada set all interest rates?

No. The Bank of Canada sets the "target for the overnight rate." The overnight rate is the interest rate that banks charge each other to cover their short-term daily transactions. The target for the overnight rate is a half-percentage-point band.

If, for instance, if that band is 1.25 per cent to 1.75 per cent, it means that banks will charge 1.75 per cent interest on money they lend to other banks and pay 1.25 per cent interest on money deposited by other banks.   A nice setup!

The chartered banks use the overnight rate as a guide in setting their prime lending rate – the rate at which the bank's best customers can borrow money.  When the central bank changes its overnight rate, it's sending a signal to the chartered banks that it wants them to change their prime lending rates.  The banks always follow suit; if the central bank raises its overnight rate and a bank leaves its prime rate unchanged, it will make less profit.

The Bank of Canada does not directly set mortgage rates or credit card rates.  Variable mortgage rates and other floating rate loans like lines of credit move up and down in lock step with the prime lending rate.  But the rates for fixed mortgages depend more on the bond market. 

Banks rely on the bond market to raise money for those kinds of mortgages.  Interest rates on the bond market can move up or down more frequently than the prime rate because the bond market is far more sensitive to market fluctuations.  Rates move when traders believe the central bank may be about to increase – or reduce – interest rates. You can find more about this and other Bank of Canada Monetary policies at Bank of Canada.  This information is mostly from cbc.ca/news As of May 3, 2011 the Bank Prime Rate was 1.00%

You may wish to read more at google about how the Bank of Canada sets interest rates and it's policies

If you have any questions about bank rates or mortgage rates please email me

Thank you,

Mark