Policy interest rate: what it is and what it changes for your money

What is the policy rate?

The policy interest rate, officially the “target for the overnight rate”, is the Bank of Canada's main tool to keep inflation under control. It is the rate at which the Bank wants major financial institutions to lend each other money for one day.

The Bank announces it on eight fixed dates each year. It can raise it, lower it or leave it unchanged. See the current rate and its history.

Why it goes up or down

The Bank of Canada aims for inflation of 2%, the midpoint of a 1% to 3% range. It adjusts its policy rate to get there.

• When the economy grows too fast and inflation could rise, it can raise the rate: borrowing costs more, and people tend to save more and spend less.
• When the economy struggles and inflation could fall well below the target, it can lower the rate: borrowing costs less, which encourages spending.

To understand what inflation measures, see Inflation: what the CPI measures.

What it changes for you

• The prime rate: each bank sets its own based on its funding costs, which the policy rate influences. It therefore generally follows the Bank of Canada's decisions.
• Lines of credit and variable-rate mortgages: their rate is based on the prime rate, so it moves after a decision.
• Fixed-rate mortgages: the rate of an existing loan does not change until renewal. New fixed rates depend mostly on lenders' funding costs, which the policy rate only partly influences.
• Savings: rates offered on deposits, guaranteed investment certificates (GICs) and other savings products also respond to changes in the policy rate.

A simple example

On the other hand, a GIC you already bought keeps its rate until it matures: new rates matter when you reinvest.

To see where your debt payments and savings fit in your month: