The low down on interest rates

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Have you ever wondered, “Who sets the interest rates in Canada?” or “Who governs Canada’s monetary policy?” No? Just us? Well, just in case you’ve heard some talk about the Bank of Canada or interest rates lately, we’re here to give you the low down.

The players

The Bank of Canada is responsible for formulating Canada’s monetary policy. It was chartered in 1934 under the Bank of Canada Act and it works to ensure our financial system is safe and sound. They’re also the same folks who have the authority to issue currency, so you could say they’re pretty important.

When it comes to interest rates, the Bank of Canada is responsible for raising and lowering them. For example, when inflation gets too high (when too many dollars chase too few goods), they may choose to increase interest rates. This is done to encourage saving rather than spending and help improve the balance between supply and demand. More specifically, you’ve probably been hearing about something called the ‘overnight rate’. The overnight rate is the interest rate that financial institutions use to lend and borrow one-day funds among themselves. How high (or low) the overnight rate is, influences the interest rates that financial institutions can offer their customers on loans and mortgages.

How does the Bank of Canada decide the overnight rate?

The Bank of Canada makes decisions on interest rates eight times per year on a fixed schedule. On these fixed dates, the Bank will announce whether interest rates will be raised, stay the same, or decrease. This decision is influenced by a variety of factors, like inflation and our overall economic situation.

What does that mean for me?

It depends! If the Bank of Canada raises rates, you can expect to pay a little more interest if you’re planning to borrow funds. If you have a line of credit or variable rate loan or mortgage, you can expect to see a slight increase in your interest rates. If you already have a loan or a mortgage and have a fixed rate, you won’t see any changes.

Higher interest rates may help your savings—specifically, they may increase how much interest you earn in your savings accounts.

So, now what?

Now that the economy has slowly started to recover from the Covid-19 Global Pandemic, interest rates are starting to creep up again.

When rates do increase, it isn't usually a drastic change—we’re only talking a quarter to a half of one percentage point (0.25–0.50%), but small increases can add up over time.

Looking for more information? Check out the Bank of Canada's website.