What the Bank of Canada does
The Bank of Canada sets the policy interest rate that shapes Canadian mortgages, savings and the loonie. Here is how it works in plain English.
When the Bank of Canada changes its interest rate, mortgage rates, savings rates and the Canadian dollar can all move within hours. Here is what the Bank does and why markets watch it.
What it is
The Bank of Canada is Canada's central bank. Its main job is to keep inflation low and steady. Its target is 2% a year, the middle of a range from 1% to 3%.
Its main tool: the policy rate
The Bank sets the policy interest rate, also called the overnight rate. This is the rate at which the big banks lend to each other overnight. Banks then set their own prime rates from it, and prime rates feed into variable-rate mortgages, lines of credit and many loans.
- To bring inflation down, the Bank raises the rate. Borrowing costs more and spending slows.
- When the economy is weak and inflation is under control, it cuts the rate.
When it decides
The Bank announces rate decisions on eight scheduled dates a year, at 9:45 a.m. Eastern time. Four times a year it also publishes its Monetary Policy Report, with its forecasts for growth and inflation.
Why markets react
A rate cut can lift Canadian shares, especially banks and real estate companies, and can push the loonie down. A rate rise can do the opposite. As with the US Federal Reserve, markets move most when the decision is a surprise. See What the Federal Reserve does.
The short version
- The Bank of Canada aims to keep inflation near 2%.
- It does this mainly by moving its policy interest rate.
- Its decisions move mortgage rates, savings rates, the loonie and the TSX.
This is general information, not investment advice.
Updated