Canada Prime Rates History (1974 – 2023)

The prime rate in Canada, often simply referred to as the “prime,” is the annual interest rate that major Canadian banks and financial institutions use to set interest rates for variable loans and lines of credit, including variable-rate mortgages and home equity lines of credit.

The prime rate is primarily influenced by the policy interest rate set by the Bank of Canada, also known as the overnight rate. When the Bank of Canada changes the overnight rate, it affects the cost of borrowing for the banks, and they, in turn, adjust their prime rates accordingly.

Who Sets the Prime Rate?

The prime rate in Canada is set by each individual bank, but it is typically closely tied to the policy interest rate set by the Bank of Canada. This rate is used by the banks as a base rate for a variety of their products including loans, mortgages, and savings accounts. Banks will then add their own markup to the prime rate to determine the interest rate they offer to their customers.

How does the prime rate impact you?

The prime rate can significantly impact your personal finances. If you have a loan or a mortgage with a variable interest rate, changes in the prime rate will directly affect the amount of interest you have to pay. When the prime rate rises, your interest payments will increase, and when it falls, your interest payments will decrease.

Moreover, the prime rate also affects the interest rates on savings accounts and investments. When the prime rate is high, you can earn more interest on your savings and investments. However, when it’s low, your potential earnings decrease.

Prime Rate and Variable Interest Rates

Variable interest rates are often expressed as a certain percentage above or below the prime rate. This means that when the prime rate changes, the interest rate on any variable-rate loans or mortgages you have will change too. For example, if you have a variable-rate mortgage and the prime rate increases, your mortgage interest rate will also increase. Conversely, if the prime rate decreases, your mortgage interest rate will decrease.

The Prime Rate and Bank of Canada Target Overnight Rate

The prime rate and the Bank of Canada’s target overnight rate are closely linked. The overnight rate is the interest rate at which major financial institutions borrow and lend one-day (or “overnight”) funds among themselves; this rate influences other interest rates, such as those for consumer loans and mortgages. When the Bank of Canada changes its target for the overnight rate, it’s usually followed by changes in the prime rate.

Why Does the Prime Rate Follow the Bank of Canada Target Overnight Rate?

The prime rate follows the Bank of Canada’s target overnight rate because the overnight rate is one of the main tools used by the Bank of Canada to influence monetary policy. When the Bank of Canada wants to stimulate the economy, it lowers the target overnight rate, which in turn leads banks to lower their prime rates, making borrowing cheaper and encouraging spending. Conversely, when the Bank of Canada wants to cool the economy, it raises the target overnight rate, causing banks to raise their prime rates, making borrowing more expensive and discouraging spending.

The Spread Between Prime Rates and the Overnight Rate

The spread between the prime rate and the overnight rate can vary, but the prime rate is typically a few percentage points higher than the overnight rate. This spread represents the banks’ profit margin. It compensates them for the risk they take on when they lend money, and for their operating costs.

Prime rates overtime (1945 to 2023, a history)

The prime rate in Canada has seen significant fluctuations over time. In recent history, the prime rate reached a peak of 6.7% in April 2023, its highest level in the past 22 years. This was a dramatic increase from the rate of 2.45% in March 2022. This increase has had substantial impacts on the economy, including a drop in home prices and changes in borrowing behavior. The prime rate has a significant influence on the cost of borrowing in Canada, and its changes are closely watched by both individuals and businesses. In the grander scheme of things, the prime rate is influenced by various economic factors and the monetary policy decisions of the Bank of Canada​​.

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