Fast Facts

There are a number of different factors that influence a bank’s decision to adjust its lending rates in addition to the Bank of Canada’s Target for the Overnight Rate including:

  • Conditions in lending markets
  • Cost of funds in financial markets
  • Credit worthiness of customers

The bottom line

Interest rate decisions by individual banks and other financial institutions are business decisions made in a competitive marketplace.

While the Bank of Canada’s Target for the Overnight Rate does influence the pricing of credit, it does not set the interest rates that consumers pay on their loans or receive on their deposits.

For example, between September 2010 and January 2015, while both the Bank of Canada’s Target for the Overnight Rate and the banks’ prime rate had remained stable, effective interest rates on bank loans fell to historically low levels.1

How does the Bank of Canada affect bank lending rates?

There is a common misconception that the interest rate on loans paid by bank customers is solely driven by the Bank of Canada’s Target for the Overnight Rate. The Bank of Canada’s Target for the Overnight Rate is one of several factors that influence bank lending rates.

Lenders continually assess market conditions to determine the interest rates they charge on loans, whether for short-term or long-term loans. An individual bank’s decisions on lending rates are impacted by conditions in lending, markets, the cost of funds borrowed by banks in financial markets, and the credit worthiness of individual customers.

Changes in the Target for the Overnight Rate are meant to influence interest rates in the market, including the lending rates of the banks and other lenders, not set them. There is a common misconception that the interest rate on loans paid by bank customers is solely driven by the Bank of Canada’s Target for the Overnight Rate. The Bank of Canada’s Target for the Overnight Rate is one of several factors that influence bank lending rates.

Target for the Overnight Rate: The interest rate that the Bank of Canada uses to signal the direction of monetary policy. It is the target interest rate that the Bank of Canada wants major financial institutions to use when lending and borrowing one-day funds among themselves.

Prime Rate: A benchmark rate of interest set by individual banks and other lenders from which the interest rate charged on loans to customers is calculated.

Lending rates to consumers and businesses can change despite no change in the Target for the Overnight Rate and bank prime rates

Data from the Bank of Canada demonstrates that despite the fact that the Target for the Overnight Rate (0.5%) and the banks’ prime lending rates (2.7%) remained stable between July 2016 and October 2016, lending rates paid by borrowers decreased to historically low levels. Consumers and businesses were able to benefit from lower lending rates despite no change to the Bank of Canada’s Target for the Overnight Rate or the banks’ prime lending rates. And according to a report from Mortgage Professionals Canada, the average mortgage interest rate fell to 3.02% in 2016 from 3.07% in the fall of 2015. And of the mortgage holders who renewed their mortgage during 2016, 64% saw a reduction in their rate.2


1 Bank of Canada Website, Trends in Key Interest Rates
2 Annual State of the Residential Mortgage Market in Canada, Mortgage Professionals Canada, December 2016