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Home -> Statistics
-> Bank of
Canada Interest Rates and Inflation
Bank of Canada Interest Rates and Inflation
The Bank of Canada sets interest rates in order to try to keep
inflation at 2%, with an "inflation-control range" of 1% to 3%. The rate of inflation is measured using the
12-month rate of change in the consumer
price index produced by Statistics Canada.
Target Overnight Rate
The Bank of Canada rate that is quoted in the press is
actually the target overnight rate.
The Bank of Canada takes deposits and lends money on a one-day basis from and
to financial institutions. The rate that the Bank of Canada pays to
financial institutions for funds on deposit for one night is called the deposit
rate. The rate at which they can borrow money from the BOC for one
night is called the bank rate. When the financial institutions
borrow and lend funds on a one-day basis among themselves, they usually use the
overnight rate. The overnight
rate can vary from the target overnight rate, but will stay within the rates
paid and charged by the Bank of Canada, the range of which can vary.
The Bank has a system of eight
fixed dates each year on which it announces whether or not it
will change the policy interest rate.
Trying to Control Inflation
If inflation is rising
too fast, the Bank of Canada will increase the target overnight rate.
This will cause an increase in other interest rates charged to consumers,
which should result in a reduction in borrowing and spending, which will slow
down inflation. If inflation is rising too slowly, the Bank of Canada
will reduce the target overnight rate. This will cause a reduction in
other interest rates, which should result in an increase in borrowing and
spending, stimulating the economy. See Can the
Canadian Government Print Money and Spend it?, which includes information
on how the Bank of Canada works, and on the Canadian money supply.
Bank Prime Rate
The bank prime rate is the interest rate charged by
financial institutions to their best, or most creditworthy, customers.
The prime rate normally varies as the BOC target overnight rate varies.
The bank rates for different types of loans are based on the prime rate.
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