Today’s Prime Rate in Canada
September 16, 2024 – The prime interest rate in Canada is currently
The prime rate in Canada as of today is
Mortgage Industry Insights: September 2024
Bank of Canada Rate Announcement
The latest Bank of Canada (BoC) announcement on September 4th was a policy interest rate decrease to
While inflation has eased, the growth in shelter costs, particularly rent and mortgage interest costs, is currently the most significant contributor to total inflation. The Governing Council continues to monitor core inflation numbers when assessing policy rate decisions to ensure there is sustained downward momentum in inflation.
The next announcement will be on October 23rd. Using nesto’s proprietary overnight index swap and forward rate calculation data, bond markets are currently pricing in the probability of further rate cuts. However, without further sustained reductions to core inflation, the Bank may leave the key rate unchanged.
Real Estate Market Update
On August 15th, the Canadian Real Estate Association (CREA) released its July home sales data. The data showed that home sales fell 0.7% between June and July, offsetting some of the gains made in June.
July’s home sales activity reported that new listings increased by 0.9% month-over-month, which was led by an increase in new supply in Calgary. Slower sales and more new listings continue to increase the number of homes available for sale across most of the Canadian housing market.
Slower sales may likely be the last, as the Bank of Canada’s rate cuts may increase real estate activity. Rate cuts are anticipated to bring some pent-up demand back into the market, with buyers having more housing options than at any point in almost 5 years. Prices have stagnated across most markets except for Calgary, Edmonton, and Saskatoon, where prices have steadily climbed since last year.
CPI Inflation Update
Statistics Canada’s latest inflation data, released on August 20th, showed the Consumer Price Index (CPI) rose 2.5% year-over-year in July, down from 2.7% in June. This month’s slowdown is attributed to slower year-over-year growth in travel tours, passenger vehicles and electricity.
Shelter prices continued to be a more significant driver of inflation in July, up 5.7%, down from the 6.2% recorded for June. Higher interest rates are impacting Canadians’ spending patterns, as they are now spending less on discretionary items and delaying big-ticket purchases. This may be contributing to lower demand as prices for durable goods fell 1.7% in July.
What is the Prime Interest Rate?
Canada’s major banks and lenders use the prime rate as a benchmark for their variable-rate loans, lines of credit, and mortgages. A variable rate floats with the prime rate, unlike a fixed rate that remains the same throughout a loan’s term. As the prime rate fluctuates, the interest rate charged on variable interest products changes with the lender’s prime.
Important: Although the prime rate and Bank of Canada (BoC) policy interest rates differ, every lender’s prime rate is heavily influenced by the BoC policy rate.
*Most Recent Prime Rate Shown
Source: BankofCanada.ca
How is a Prime Rate Determined?
The prime rate is mainly influenced by the Bank of Canada (BoC) policy interest rate – also referred to as the target of the overnight rate. These rates are not the same, but when the BoC adjusts its overnight rate target, lenders will often follow suit by changing their prime rate within a few days.
How Does the Prime Rate Impact Variable Mortgage Rates?
The BoC overnight target (policy) rate influences prime rates. When the policy rate changes, prime rates will fluctuate accordingly. Most lenders determine their prime rates based on the policy rate + 2.2%. Lenders will use the prime rate to set their posted rates, which are the rates that lenders advertise. These posted rates combine the prime rate plus or minus any additional percentage points. For example, a lender may advertise a rate as prime + 0.5% or -0.5%, meaning you will be charged the prime rate plus or minus 0.5%.
Variable-rate mortgages can either have fixed payments or payments that fluctuate with changes to the prime rate. Variable-rate mortgages with fluctuating payments, also known as adjustable-rate mortgages (ARM), are not impacted by negative amortization, as payments will adjust to compensate for changes to your mortgage rate.
If you have a mortgage with fixed payments, your mortgage rate will increase if the prime rate changes. Although your regular payment will stay the same, more will go toward the interest portion, and less will go toward the principal. This could mean that you end up with more of your mortgage remaining at the end of the term, known as negative amortization.
If the prime rate decreases, your mortgage rate will decrease as well. Less of your payment will go toward the interest portion, while more will go to the principal. This could mean that you pay off your mortgage sooner and have less of your mortgage remaining at the end of your term.
How Does the Prime Rate Impact Fixed Mortgage Rates?
In the short term, changes in the prime rate in Canada have a minimal direct impact on fixed mortgage rates. This is because the bond market primarily determines fixed mortgage rates, particularly the yields on Government of Canada bonds. These bonds serve as a benchmark for lenders when setting fixed mortgage rates, making them relatively insulated from immediate fluctuations in the prime rate.
However, a more indirect and long-term relationship exists between prime and fixed mortgage rates. The Bank of Canada’s policy rate adjustments, which influence the prime rate, signal its outlook on the economy, GDP and inflation. If markets anticipate these policy changes to be persistent, they will factor them into bond yields, which will, in turn, affect fixed mortgage rates. For example, multiple policy rate cuts by the Bank of Canada might lead to expectations of further decreases, pushing down longer-term bond yields and consequently decreasing fixed mortgage rates.
While bond yields are the primary driver of fixed mortgage rates, banks also factor in their overall cost of funds, which is influenced by the prime rate. A significant rise in the prime rate could lead banks and lenders to slightly increase their fixed rates to maintain profitability, even if bond yields remain stable. While changes in the prime rate might not have an immediate and direct effect on fixed mortgage rates, they can indirectly impact them over time through market expectations and the lender’s profitability.
Prime Rate Relationship to the Bank of Canada Overnight Rate
All lenders set their own prime rate, influenced by the BoC overnight rate. Not all lenders will change rates simultaneously when the rate changes, so there can be a lag of a few days to a few weeks, depending on the lender. It’s also important to note that lenders are not required to change their prime rate to match changes to the BoC overnight rate, though competition usually forces them to increase or decrease rates to match those of their competitors. Each lender sets their prime rate higher (usually 2.2%, but not always) than the policy rate, pricing in the added costs and risks associated with mortgages.
History of Prime Rates in Canada
Source: bankofcanada.ca
Bank of Canada Formed in 1935
The Bank of Canada was founded in Ottawa in 1935 with a mandate “to regulate credit and currency in the best interests of the economic life of the nation.” The BoC determines the target for the overnight rate, and it can make changes at any time. Since its inception, it has helped the country rise from the Great Depression that crippled the world.
1935 – 1955: The Great Depression, World War II & Post War
The Great Depression and World War II significantly impacted the economy, causing strong criticism of Canada’s financial system. The target overnight rate in Canada started at 2.5% in 1935 and fell to 2.0% by the end of 1955. Although the rate fell to 1.5% in 1945, Canada’s role in supplying natural and manufactured resources during WWII helped uplift the economy.
1977 – 1991: Global Oil Crisis
The Canadian economy continued a slow rise after World War II until it hit a high of 10.28% in October 1978. The oil boom and record-high prices caused by the OPEC oil embargo saw the target overnight rate increase to 20.03% in 1981 before falling steadily to 7.14% in March 1987.
1991 – 2008: Economic Recovery
The target overnight rate remained relatively stable during the economic recovery following the 1980s recession, generally decreasing with a few exceptions. The BoC introduced the inflation target rate in 1991 to achieve price stability through low, stable and predictable inflation.
2009 – 2017: The Great Financial Crisis
The financial crisis 2009 saw the BoC overnight rate fall below 1%, reaching a record low of 0.5%. A fall in oil prices in 2014 also contributed to the recession in Canada, which affected rates that recovered by 1.25%. They then fell back to 0.75% in 2015.
2018 – 2022: COVID
After the financial crisis, Canada’s economy grew significantly. Although inflation in 2019 prevented the BoC rate from increasing beyond 1.75%, the COVID-19 pandemic caused a reversal that saw rates plunge to 0.25% by the first quarter of 2020. The rate remained near 0.25% throughout most of 2020 and 2021 as the impacts of reduced consumer spending continued with the uncertainty of the pandemic.
2022 – Present: Fight to Control Inflation
As inflation increased in early 2022, the BoC started raising the overnight rate to fight inflation. From the beginning of 2022 until the end of 2022, the BoC raised the target overnight rates from 0.25% to 4.25% in an effort to bring inflation back under control. As inflation remains above the BoC 2% target, the Bank has raised the overnight rates to 5.00%, where they remain today.
Canada Prime Rate Forecast
Inflation is up year-over-year, meaning we are still not near the BoC target of 2%. It is now anticipated that inflation may remain stubbornly high and not reach the 2% target until sometime in 2025. Economist predictions so far indicate that we may not see rate cuts until mid-2024, and even then, they may be gradual at 25 basis points per quarter.
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