Updated July 4th, 2020
The Bank of Canada is a crown corporation and Canada's central bank. It was chartered in 1934 under the Bank of Canada act and is responsible for formulating Canada's monetary policy and regulating Canada's financial systems. Its principal role is "to promote the economic and financial welfare of Canada". Led by a governing council, its main tool for conducting monetary policy is the target for the overnight rate, or the key policy rate. By changing this rate, it can influence the supply of money circulating within Canada's economy. It is also solely responsible for the issuance and distribution of Canadian currency and regulation of foreign currency reserves.
|Date||Target Overnight Rate||Change|
|December 9th||To Be Decided||--|
|October 28th||To Be Decided||--|
|September 9th||To Be Decided||--|
|July 15th||To Be Decided||--|
The Bank of Canada makes its decisions based on the growth of the Consumer Price Index (CPI) from Statistics Canada. This is calculated from the price of a monthly “basket” of goods and services typically used by Canadians. It represents a broad picture of consumer spending across Canada.
Using its monetary policy tools, the Bank of Canada aims to maintain inflation, as calculated by changes in the CPI, within a certain range. Introduced in 1991, the inflation-control target sets a range of 1% – 3% as the ideal range for annual inflation, with the midpoint of 2% being the common target rate. This range is reviewed regularly with the latest review being in October 2016.
The Bank of Canada reviews its benchmark interest rate eight times a year and considers both local and international current and potential influences in their review. Although the Bank of Canada operates independently of the government, it is are ultimately responsible to Parliament through the Minister of Finance.
Recent events have pushed the Bank of Canada to rapidly drop their Target Overnight Rate to 0.25% in early 2020. We expect the economic impacts of COVID-19 and deflationary consumer spending environment to continue throughout the rest of 2020 and 2021. As a result, we believe that the Bank of Canada will continue to keep rates near the zero lower bound until 2021. Given the zero lower bound and the Bank of Canada's recent resistance to lowering rates below 0.25% despite continued easing from other central banks, we do not expect the Bank of Canada to drop their Target Overnight Rate below 0%.
Through the key policy rate and its other monetary policy tools, the Bank of Canada influences the interest rate for all borrowing and lending transactions in Canada. For example, changes in the key policy rate usually lead to changes in bank Prime rates. Subsequently, the key policy rate has significant influence on variable mortgage rates that are based on a lender's Prime rate.
Changes in the key policy rate and monetary policy can also affect fixed mortgage rates. Fixed mortgage rates usually follow the yields of Government of Canada 5-Year bonds. A shift in monetary policy can lead to changes in the bond yields, which will then lead to changes in fixed mortgage rates.
|Date||Target Overnight Rate||Change|
|March 27th 2020||0.25%||-0.5|
|March 16th 2020||0.75%||-0.5|
|March 4th 2020||1.25%||-0.5|
|October 24th 2018||1.75%||0.25|
|July 11th 2018||1.5%||0.25|
|January 17th 2018||1.25%||0.25|
|September 6th 2017||1%||0.25|
|July 12th 2017||0.75%||0.25|
|July 15th 2015||0.5%||-0.25|
|January 21st 2015||0.75%||-0.25|
|September 8th 2010||1%||0.25|
|July 20th 2010||0.75%||0.25|
The Bank of Canada was created as part of the Bank of Canada Act in 1935. It was recommended by the Royal Commission in response to the economic conditions of the Great Depression. In March 1935, the Bank of Canada was opened to the public as a private institution with shares sold to public investors. It was quickly nationalized as a public institution by an amendment to the Bank of Canada Act in 1938.
The Bank of Canada rate (not officially the target overnight rate until much later in the century) started at 2.5% in 1935 and ended at 1.5% in 1945. The economy strengthened during the war as Canada played a vital role in supplying natural and manufactured resources to the Allies. There was also increased employment, especially of women. The decrease in the Bank of Canada rate encouraged people and businesses to borrow money to invest in new manufacturing plants and housing.
After World War II, the Bank of Canada rate did not rise until October 1955, when it was changed to 2.0%. This low-interest rate environment promoted investment in new infrastructure, manufacturing, housing and consumer goods.
After the upward change in 1955, the Bank of Canada rate continued to rise slowly throughout the 1960s and early 1970s. In October 1978, the benchmark rate hit double digits for the first time at 10.25%. This was due in part to the global oil crisis and the OPEC oil embargo. With record-high prices for oil in August 1980 that continued into 1981, the Bank of Canada rate hit an all-time high of 20.03% in August 1981. The lowest rate reached during this period was 7.14% (March 1987).
After the recession of the 1980s, the Bank of Canada rate between 1991 – 2009 generally went downwards with only a few exceptions. The inflation-target rate was introduced at the beginning of this period.
In March 2009, the BOC rate dipped below 1% for the first time to 0.5% in response to the Great Financial Crisis. Despite a minor recovery, in 2014, oil prices dropped a staggering 60%, causing a recession in Canada's oil-driven export economy. The Bank of Canada rate then dropped from 1.25% to 0.75% in 2015.
Despite widespread economic growth, 2018 and 2019 were marked by continued low inflation, preventing the Bank of Canada from raising rates any higher than 1.75%. This was quickly reversed with the impact of COVID-19 with a two 50 basis point drops in March 2020. The Bank of Canada rate now lies near its lower limit at 0.25% and is unlikely to be raised anytime soon due to the deflationary impact of reduced consumer spending and distressed economy.