Interest rates in Canada — a brief history
Over the years, the Bank of Canada has adjusted the way it sets its key interest rate. Following is a brief history of the key rate from the Bank’s founding in 1935 until the present.
March 1935 to November 1956 The original key interest rate was the Bank Rate. This is the minimum rate of interest that the Bank of
Canada charges on one-day loans to financial institutions. Between March 1935 and November 1956, the Bank Rate was fixed, set directly by the Bank.
November 1956 to June 1962 The Bank Rate became a floating rate, set at 25 basis points above the average yield on 3-month treasury bills at the federal government’s weekly auction.
June 1962 to March 1980
The Bank Rate was again fixed, set directly by the Bank.
March 1980 to February 1996 The Bank Rate was returned to a floating rate, set at 25 basis points above the average yield on 3-month treasury bills at the federal government’s weekly auction.
February 1996 to present
Since 1996, the Bank Rate has been set by the Bank at the top of its operating band for the overnight rate. This provides a clearer indicator of monetary policy intentions, because the Bank’s influence on the overnight rate is more direct than on 3-month Treasury bill rates.
In December 2000, the Bank began setting the level of the Bank Rate— and with it, the target for the overnight rate—on eight fixed dates per year in January, March, April, June, July September, October & December.
The Bank of Canada sets the Bank Rate and financial institutions set the Prime Rate. Each bank or lender determines their own Prime rate. Banks in Canada usually look to the target overnight rate, or the Policy Interest Rate set by the Bank of Canada (BoC). Changes in the target overnight rate are usually followed by similar changes in Prime rates. As a result, most banks and lenders in Canada have similar Prime rates.
The Prime rate has a very close relationship with the Bank of Canada target overnight rate. Since the late 1990s, the Prime rate has stayed within a 50 basis point range around 200 basis points (2 percentage points) above the Bank of Canada rate. Current Prime Rate at the time of writing is 5.45% from all the major banks.
A. Craig Elder, CFP, FMA, CIM, FCSI, is a Senior Portfolio Manager and Wealth Advisor with Elder & Punko Wealth Advisors of RBC Dominion Securities Inc. in Medicine Hat www.elderpunkowealth.ca . Source material provided by Bank of Canada. RBC Dominion Securities is a member of the Canadian Investor Protection Fund. For more information on this and other financial strategies, contact Craig at craig. elder@rbc.com or 403-504-2723.