Canada Prime Rates

Canada's central banking history reflects the evolution of its financial system and the establishment of the Bank of Canada, which plays a crucial role in managing the country’s monetary policy and economic stability. Here's an expanded overview of the key phases:

• Early Banking and Provincial Banks: In the 19th century, Canadian banking was dominated by private banks, provincial banks, and chartered banks, each issuing their own currency. Provinces like Ontario and Quebec had their own notes, creating inconsistencies and instability in the money supply and banking practices.

• Currency Standardization Efforts: Following Confederation in 1867, the federal government made several attempts to unify the currency system. In 1871, the Uniform Currency Act was enacted, introducing the Canadian dollar and bringing some standardization, though banks retained their powers to issue currency.

• National Debates on Central Banking: Over time, as economic activity grew, debates emerged over the need for a central bank. The banking sector was initially resistant, as private banks benefitted from self-regulation and profit from note issuance.

• Economic Instability: The Great Depression in the 1930s highlighted Canada's need for a central institution to manage monetary policy. Canada’s economy was hit hard, with high unemployment, falling prices, and bank failures. Calls for central control of the currency grew stronger.

• Macmillan Report (1933): In 1933, the Canadian government commissioned the Macmillan Commission, which studied banking reforms. The commission recommended establishing a central bank to manage the currency and stabilize the economy.

• Political Support: The idea gained political traction, and in 1934, the Canadian Parliament passed the Bank of Canada Act, laying the foundation for a central bank to be responsible for monetary policy and currency issuance.

• Charter and Structure: The Bank of Canada was established as a privately held institution in 1935. However, in 1938, the government nationalized it, making it a Crown corporation wholly owned by the federal government to ensure it would serve the public interest.

• Mandates: Initially, the Bank of Canada’s primary roles were to issue Canadian currency, serve as a banker for the government, and supervise other banks. It was also tasked with managing foreign exchange reserves and controlling inflation.

• Currency Standard: Canada adhered to the gold standard until 1931, when the Great Depression forced many countries, including Canada, to abandon it. This shift allowed the Bank of Canada greater flexibility in managing the money supply without gold reserves backing the currency.

• Economic Boom: Following World War II, Canada experienced significant economic growth, and the Bank of Canada played a key role in managing inflation and stabilizing the economy. Focusing on price stability, it employed new tools like interest rate adjustments.

• Currency Evolution: The bank took steps to improve the design, security, and durability of Canadian currency, issuing notes with advanced anti-counterfeit features.

• Floating Exchange Rate: In 1970, Canada became one of the first major economies to adopt a floating exchange rate, allowing the Bank of Canada to focus more on domestic monetary policy adapting to changes in the global economy.

• Inflation Control Framework: In the early 1990s, the Bank of Canada introduced an inflation-targeting policy, setting a target inflation rate of 2%, within a range of 1% to 3%. This framework became a central feature of its policy, aiming to provide price stability and foster long-term economic growth.

• Financial System Supervision: While the Bank of Canada does not directly regulate commercial banks (that role belongs to the Office of the Superintendent of Financial Institutions, or OSFI), it monitors the financial system’s overall stability and provides liquidity support as a lender of last resort.

• Crisis Response and Quantitative Easing: During the 2008 financial crisis and the COVID-19 pandemic, the Bank of Canada implemented unprecedented measures like quantitative easing to maintain liquidity, lower borrowing costs, and stabilize the financial system.

• Public Engagement and Transparency: The bank has increased its transparency, holding regular press conferences, publishing Monetary Policy Reports, and releasing policy decisions to improve public understanding and trust in its actions.

• Digital Currency Research: The Bank of Canada is currently exploring the potential for a central bank digital currency (CBDC) as digital payment methods evolve and the use of cash declines.

• Climate Change and Sustainable Finance: The bank has also been assessing the risks of climate change on financial stability and exploring ways to support sustainable finance initiatives.

• Technological Upgrades: The Bank of Canada has modernized its payment systems and participates in global efforts to ensure cross-border payment efficiencies.

Canada’s central banking system has evolved significantly, adapting to economic changes while focusing on monetary stability, financial system integrity, and transparency.

Following the 2008 financial crisis, the Bank of Canada maintained a relatively low and stable interest rate environment to support economic recovery. The prime rate hovered between 2.50% and 3.00% during this period. Economic growth was modest, inflation remained within target, and monetary policy was largely accommodative.

Canada's Prime rate in 2018 rose from 3.45% to 3.95% as the Bank of Canada raised its target overnight rate from 1.25% to 1.75%. Canada's economy ran at near capacity with rising housing markets and high oil prices. Combined with a lower Canadian dollar, inflation was edging above the Bank of Canada's target of 2%. In response to inflation and strong economic growth, the Bank of Canada raised interest rates to keep inflation within their target range.

Canada's Prime rate in 2019 remained stable at 3.95% as the Bank of Canada maintained its target overnight rate at 1.75%. Despite increasing asset prices with the S&P/TSX Composite index growing 19% in 2019 and stable global economic growth, pressures from Canada's lagging energy sector and uncertain trade relationships with US and China created a headwind to further tightening of monetary policy and rising interest rates.

Canada's Prime rate in 2020 quickly dropped to 2.45% by the end of the first quarter as the Bank of Canada lowered its target overnight rate from 1.75% to 0.25% in response to economic pressures caused by COVID-19. Canada's GDP fell by 7.5% in March followed by a record-breaking decline of 11.6% in April. The Bank of Canada signalled that they did not expect to raise rates until at least 2023 .

Canada's prime rate in 2021 was stable for the year, but there were increasing signals for an increase as soon as early 2022. Canada's economic recovery had exceeded the Bank of Canada's initial expectations, prompting the BoC to initially signal for a rate hike and tighter monetary policy in mid-2022. Inflation in 2021 had also reached beyond the BoC's 2% target range, which added additional pressure to the BoC to raise rates. However, the Bank of Canada did not raise rates in 2021.

High inflation, record-high housing prices, and rising cost of living has been the running backdrop to Canada’s recovery from COVID-19. The Bank of Canada started off the year with a 25 basis point rate hike in March 2022. This was quickly followed by another 50 basis point rate hike in April 2022, the largest single rate hike in over 20 years. Prime rates rise throughout 2022 to end the year 2022 at 6.45%. This rise caused trouble for some variable rate mortgage borrowers, who hit their mortgage trigger rate, which means they were not making enough payments to cover their mortgage interest.

The Bank of Canada maintained its tightening stance in 2023, raising the prime rate from 6.45% to 7.20% by mid-year. This was in response to persistent core inflation and strong wage growth, which kept price pressures elevated despite earlier rate hikes. The rate remained unchanged in the latter half of the year as the Bank monitored signs of economic slowdown.

With inflation returning to the Bank of Canada’s 2% target by Q3 2024, the central bank began easing monetary policy. The prime rate dropped from 7.20% to 5.45% during 2024. Falling shelter inflation and softening economic momentum contributed to the disinflationary trend. The Bank aimed to prevent real interest rates from becoming too restrictive and to support continued growth.

In 2025, the Bank of Canada continued to lower interest rates in response to mounting signs of economic weakness. The prime rate fell from 5.45% in January to 4.70% by September, moving below the estimated neutral rate of 4.95%. This shift indicates that monetary policy had entered an expansionary phase, aimed at stimulating growth rather than restraining inflation. The Bank of Canada's policy rate, which influences prime rates, was cut to 2.5% on September 17 amid softening labor markets and stable core inflation measures.

The rate cuts were driven by a combination of factors: rising unemployment, contracting GDP, and persistent trade tensions with Canada’s largest trading partner. Unemployment climbed to 7.1% in August, the highest outside the pandemic era in nearly a decade. GDP contracted by 0.3% QoQ in Q2 (1.2% annualized), with U.S. trade tensions reducing annualized growth by an estimated 1.5 percentage points. While core inflation remained sticky, headline inflation rose to 2.4% (as of September), reflecting ongoing price pressures in shelter and food categories, widening into other categories. Core measures like CPI-trim edged up to 3.1% year-over-year. The removal of the consumer carbon tax in April 2025 helped offset some inflationary forces, but not enough to reverse the upward trend. Bank of Canada analysis estimates the tax's elimination reduced the CPI level by about 0.6% through March 2026, primarily via lower gasoline and energy prices, shaving roughly 0.6 percentage points off year-over-year inflation for one year.

Despite inflation risks, the Bank may prioritize supporting domestic demand and financial stability to prevent a potential deflation over the coming months. The real interest rate—adjusted for underlying inflation—is hovering near zero, reinforcing the Bank’s shift toward growth-oriented policy.

Markets seem to expect the prime rate to stay constant around 4.45% through 2026. But this is a weighted average for the scenario where trade relation with the US stabilizes and the scenario where it worsens. So the uncertainty in this prediction is quite high.