The Bank of Canada (BoC) policy interest rate is an essential tool that influences not only the economy, but also your personal finances! It is set by the BoC and determines the cost of borrowing and returns on savings. By understanding how it works, you’ll be better prepared to adapt your financial decisions to changes in the economy: mortgages, savings and other loans.

On December 11, 2024, the Bank of Canada(BoC) decided to cut its policy interest rate by a further 50 basis points to 3.25%. Since June 2024, the rate has fallen from 5% to 3.25%.

This announcement comes at a time when inflation is hovering around 2%, and recent economic growth has been weaker than expected. In fact, growth stood at 1% in the third quarter of 2024 and is expected to be even more modest in the final quarter. Additionally, the unemployment rate rose to 6.8% in November. Finally, Donald Trump’s threat to impose tariffs on Canadian imports is a major source of uncertainty for the economic outlook.

In a recent press conference, the Bank of Canada announced that the 50 basis point rate cuts are over, and that the next ones will be more gradual. The next rate cut is scheduled for January 29, 2025.

The Bank of Canada(BoC) is Canada’s central bank. It was created in 1934 to maintain the country’s economic and financial stability.

Its primary mandate is to preserve the value of your money by controlling inflation. It accomplishes this through four key roles: managing monetary policy, ensuring a secure financial system, designing and distributing banknotes, and acting as the government’s financial agent.

Although it doesn’t directly serve citizens, it influences the economy and your finances by setting the policy interest rate.

The policy interest rate, also known as the target for the overnight rate, is the rate at which major financial institutions borrow or lend funds for one day. The Bank of Canada adjusts this rate to keep inflation at its 2% target, within a range of 1% to 3%.

When the Bank of Canada raises the policy interest rate, borrowing becomes more expensive, slowing the economy. Conversely, a decrease makes credit less expensive, stimulating spending and investment. This mechanism is at the heart of the BoC’s monetary policy.

The Bank of Canada meets eight times a year to review and adjust the policy interest rate. Rate changes, if necessary, are generally in the order of 25 basis points. However, changes of 50 basis points are also possible, as was the case in 2024. In some years, there may be no change at all. In short, these decisions are based on inflation and economic growth.

The policy interest rate is an essential tool for controlling inflation and stabilizing the economy. A rise in the rate slows consumption and investment, as borrowing becomes more expensive. A lower rate stimulates these activities, as the cost of borrowing is reduced.

This rate also affects savings rates, the real estate market and the value of the Canadian dollar. By adjusting the policy interest rate, the Bank of Canada directly influences your personal finances and the economy in general.

Variable mortgage rates move in line with the policy interest rate. If the rate rises, so do your monthly payments. Fixed mortgage rates, on the other hand, are influenced by long-term bonds. A higher policy interest rate makes buying a home more expensive.

To compare mortgages, use our mortgage rate comparator.

The policy interest rate influences your financial decisions, especially when it comes to borrowing and investing. Following the Bank of Canada’s announcements helps you anticipate economic changes and adjust your financial strategies. This knowledge can help you better plan your savings, loan repayments or home purchases.

In short, the policy interest rate is the Bank of Canada’s lever for stabilizing the economy and controlling inflation. It adjusts the rate according to inflation and economic growth. As we’ve seen, rate variations have a direct impact on your finances. For example, mortgage rates. Now that you understand how it works, you can make informed decisions, whether you’re investing, saving or planning a major purchase like a home.