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.

First off, let’s talk about 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 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 it, which helps keep the inflation rate stable at around 2%. 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.

Got it. 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.

For instance, the announcement that happened on September 5, 2018 outlined no change to the rate, for now. But consumers should expect a rise in rates at the next announcement in October.

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.

Ok, so what?

Interest rates have been at unprecedented low levels since 2008—a move that helped to stimulate the Canadian economy in the wake of the global financial crisis. Now that the economy has started to recover, interest rates are starting to creep up again.

Even if the rate were to rise, it likely wouldn’t be drastic—we’re only talking a quarter to a half of one percentage point (0.25–0.50%), so in general you won’t feel a huge impact on your wallet.

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