Policy interest rate (Bank of Canada overnight rate)
The policy interest rate is the Bank of Canada’s target for the overnight rate, which the Bank adjusts to influence short-term interest rates. It adjusts the target on fixed dates each year. Lenders set their own prime rates, and variable business loan rates can move when the policy rate changes.
A borrower with a variable-rate acquisition loan may see the rate move after a Bank of Canada announcement. The Bank says it carries out monetary policy by influencing short-term interest rates. See what determines the interest rate on an acquisition loan.
How it can reach a loan
BDC says each financial institution sets its own prime rate, and that an institution reacts to several other rates when setting it, the first of which to be set is the policy rate. BDC describes the policy rate as the target rate at which financial institutions lend funds to each other for one day. It adds that the prime rate may change each time the Bank changes the policy rate, and that no rule determines the margin institutions add to the bank rate when setting prime.
What to ask a lender
- Is the rate fixed or variable?
- If variable, which reference rate does it follow, and what margin sits on top?
- When and how does the rate reset after the reference rate moves?
- Is the loan tied to a different benchmark, such as CORRA?
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Bank of CanadaGovernmentPolicy interest rate
- 02Business Development Bank of CanadaGovernmentPrime interest rate
- 03Bank of CanadaResearch dataInterest rates posted for selected products by the major chartered banks
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