What is the Prime Rate in Canada?
Canada’s prime rate is the rate that most major banks use to establish their lending rates. Read on to find out what the prime rate in Canada is, how it is determined and most importantly, how it affects you.
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What is the Prime Rate in Canada?
The prime rate, formerly known as the prime lending rate, is the annual interest rate that financial institutions charge their most creditworthy corporate customers. However, lenders also use this key interest rate to determine the bank rates for variable loans, prime rate mortgages, and credit cards, among other products. Currently, the prime rate in Canada is 2.45%.
Who decides the Prime Rate?
Every bank or lender determines its own prime rates, but they generally follow the benchmark prime rate published weekly by the Bank of Canada. The overnight rate, otherwise known as the policy interest rate, heavily influences prime rates. The overnight rate is essentially the interest rate that banks must pay when they borrow money.
As the overnight rate set by the Bank of Canada rises, it becomes more expensive for banks to borrow money, and they, in turn, charge their customers more. This rate has remained unchanged since the end of March 2020. The benchmark policy interest rate (and target overnight rate) is currently at 0.25%.
How does the Prime Rate affect you?
Lenders, like banks, use the prime rate to set interest rates for a variety of loans, including variable rate loans. Typically the interest you pay on these loans will be directly tied to the prime rate and expressed as prime rate plus a specific percentage. That percentage depends on your credit rating, collateral and other factors.
The types of loans typically connected to the prime rate include:
- Variable-rate mortgages
- Variable-rate car loans
- Home equity lines of credit (HELOCs)
- Variable rate credit cards
When your mortgage rate is tied to the prime rate, the interest rate you pay will rise and fall alongside the prime rate. This can be of critical importance when you get a mortgage. With a variable mortgage tied to prime, you are betting that your rates will either stay the same or decrease. However, if you suspect rates might rise, you may want to lock into a fixed-rate mortgage, so you’ll know the rate will remain constant throughout the life of the loan. The upside of this option is security. However, the downside is that if the prime rate does go down, you may be paying more in interest than you would have if you took out a variable rate mortgage.
Current Prime Rates in Canada
Here are current prime rates for all of Canada’s big six banks:
Royal Bank of Canada (RBC) – 2.45%
Bank of Montreal (BMO) –2.45%
Toronto-Dominion Bank (TD) –2.45%*
Canadian Imperial Bank of Commerce (CIBC) –2.45%
National Bank – 2.45%
*TD Bank sets a separate mortgage prime rate to base its mortgage interest rates. It is typically 15 base points higher than the standard prime rate and is currently 2.60%
Prime Rates in Canada since 2010
In the late 1970s and early 1980s, prime rates in Canada were extremely volatile and soared to a record high of 22.75 per cent in the summer of 1981. However the prime rates have remained remarkably steady in more recent memory, hovering between two and four percent for the last 10 years.
Here is an example of the prime rates at RBC over the last ten years:
Why does the Prime Rate change?
Banks generally change their prime rates a few days after the Bank of Canada sets its interest rate target for the overnight rate. Usually, these changes will follow the direction set by the Bank of Canada. In other words, when the overnight rate goes up, the prime rate will follow suit, and when it goes down, prime rates will soon follow. However, there have been situations over the years where banks and other lending institutions have kept their rates high despite a drop in the Bank of Canada overnight rate.
The Bank of Canada is mandated to "promote Canada's economic and financial welfare", and it directs monetary policy, including interest rates, to accomplish this. One of the tools it uses in setting monetary policy is the overnight rate. If the economy is booming, it can raise the target overnight rate to help reduce spending and keep inflation down.
When the economy is weak or experiencing low inflation or deflation, it can lower rates to encourage borrowing and spending. This occurred at the beginning of the pandemic when the Bank of Canada dramatically lowered its overnight rate to 0.25 per cent to help sustain the economy.
Every year the Bank of Canada publishes the dates for interest rates. The last date for an announcement in 2021 is December 8. The dates for 2022 are:
- Wednesday, January 26
- Wednesday, March 2
- Wednesday, April 13
- Wednesday, June 1
- Wednesday, July 13
- Wednesday, September 7
- Wednesday, October 26
- Wednesday, December 7
Our Final Thoughts
While it is impossible to predict future prime rates with any degree of certainty you can get some insight by paying attention to the Bank of Canada announcements on interest rates. All of Canada’s big banks also publish prime rate forecasts which can provide you with some insight into whether interest rates can be expected to rise or fall in the near future.
Paying attention to prime rates just makes good financial sense. Knowing what these rates are and what direction they may be headed in will allow you to make informed decisions about the lending products that are right for you now, and into the future.
Frequently Asked Questions
Canada’s prime rate, the rate that most major banks use to establish their lending rates, is currently 2.45%. The only other time the prime rate has been this low in recent times was following the 2008 financial crisis. The current low rate is the result of a strategy pushed by the Bank of Canada at the beginning of the pandemic. The Bank of Canada leveraged its control of the overnight rate to encourage lower prime rates in the hopes of helping people fend off any potential financial hit from the pandemic with access to low credit. In late March 2020, the rate was cut three times and fell from 3.95% to the current 2.45% rate.
The Canadian prime rate has remained at 2.45% since it was cut three times in a row in early 2020 to address financial concerns during the pandemic. It is expected to re-main stable through the end of 2021, but there are increasing signs that it may begin to rise in 2022. The Bank of Canada signalled in October that it would consider raising rates, including the overnight rate, by the second quarter of 2022. This would, in turn, cause banks to raise their prime rates but the timing is not certain. Inflation, economic growth and a possible resurgence of the pandemic as vaccine immunity wanes will all influence both the decision to raise rates and the timing of that increase.
There is no sure way to predict prime rates. And this type of prediction is even less certain in recent times as the ongoing Covid-19 pandemic and supply chain woes continue to plague the economy. Even the Bank of Canada is reluctant to make an exact prediction regarding the possibility or timing of a change in the prime rate.
The best way to anticipate any change in rates is to watch the Bank of Canada responses and announcements. Pay special attention to economic pressures such as inflation rates and GDP growth and outside forces such as the pandemic and possible climate-induced economic stressors. Canadian banks also issue reports that include Canada prime rate forecasts. Economists continue to assess and discuss the possibility of prime rate increases and decreases, so watch for these pundits to speak out as well.