Current Prime Rate
January 22, 2025 – The prime interest rate in Canada is currently
The prime rate in Canada today is
Mortgage Industry Insights: January 2025
Bank of Canada Rate Announcement
The latest Bank of Canada (BoC) announcement on December 11th 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 sustained downward momentum in inflation.
The next announcement will be on January 29th. 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 January 15th, the Canadian Real Estate Association (CREA) released its December home sales data. The data showed that home sales decreased 5.8% compared to November. However, Q4 of 2024 was one of the stronger quarters for activity in the last 20 years outside of the pandemic, with sales up 10% from Q3 2024.
December’s home sales activity reported that new listings declined 1.7% month-over-month. The month-over-month decline in market activity for December is attributed to supply, as new listings have declined for the past three months after a considerable increase in supply in September. On a year-over-year basis, monthly activity increased 19.2% above December 2023.
CPI Inflation Update
Statistics Canada’s latest inflation data, released on January 21st, showed the Consumer Price Index (CPI) rose 1.8% year-over-year in December, down from 1.9% in November. This month’s slowdown is attributed to slower price growth in items affected by the temporary GST/HST break. Food purchased from restaurants and alcoholic beverages purchased from stores contributed the most to this month’s deceleration.
Shelter prices continued to be a more significant driver of inflation in December, up 4.5%, down from the 4.6% recorded in November. Higher interest rates are impacting Canadians’ spending patterns, as they are now spending less on discretionary items and delaying big-ticket purchases.
What Is the Prime Interest Rate?
The prime interest rate is how leading banks and lenders in Canada set their pricing on variable-rate loans, lines of credit, and mortgages. Unlike fixed rates, which remain constant over the loan term, variable and adjustable rates fluctuate alongside the prime rate.
Adjustable-rate mortgages (ARMs) are a common type of variable product where your monthly payment may vary as the prime rate changes. As the prime rate shifts, the interest charged on these products adjusts to reflect the lender’s current prime rate.
It’s important to note that while the prime rate differs from the Bank of Canada’s (BoC) policy interest rate, the BoC’s target overnight rate significantly influences each lender’s prime rate. This relationship ensures that BoC’s policy rate changes ripple through to borrowing costs across Canada.
*Most Recent Prime Rate Shown
Source: BankofCanada.ca
How Is a Prime Rate Determined?
The prime rate in Canada is closely linked to the Bank of Canada’s (BoC) policy interest rate, often called the target overnight rate. While the two rates are not identical, the prime rate typically adjusts shortly after BoC’s policy rate changes.
Here’s How It Works:
- Bank of Canada’s Role: The BoC sets the policy interest rate to manage inflation, promote economic growth, and ensure financial stability. By influencing borrowing costs, the BoC aims to control economic activity and achieve its monetary policy goals.
- Impact on Lenders: When the BoC raises or lowers its overnight rate, major financial institutions usually adjust their prime rate within a few days. The overnight rate directly affects the cost of borrowing between banks, making it a critical factor in determining the prime rate.
- Lender Decisions: While most lenders follow the BoC’s lead, their specific adjustments to the prime rate may vary slightly due to differences in cost structures or competitive strategies. Some lenders may delay or fine-tune changes to align with their market positioning.
The prime rate is the key benchmark interest rate for variable-rate financial products, including variable-rate mortgages, home equity lines of credit (HELOCs), and personal or business loans. An increase in the prime rate raises borrowing costs, while a decrease makes credit more affordable, directly affecting Canadian consumers and businesses.
How Does the Prime Rate Impact Variable Mortgage Rates?
The Bank of Canada’s (BoC) target overnight rate directly influences prime rates set by lenders. When the policy rate changes, prime rates adjust accordingly. Most lenders calculate their prime rate as the BoC’s policy rate plus approximately 2.2%. This prime rate is the foundation for lenders’ posted rates, which they advertise to borrowers.
Posted rates typically include the prime rate plus or minus a specific percentage. For example, a lender might offer a prime + 0.5% or prime – 0.5% rate, meaning you’ll pay the prime rate with a premium or discount.
Variable-rate mortgages, tied to the prime rate, can have fixed or adjustable payments.
- Adjustable-rate mortgages (ARM): These mortgages have payments that fluctuate whenever the prime rate changes. Since the payment adjusts automatically, negative amortization is avoided when the interest owed exceeds the payment.
- Variable-rate mortgages (VRM): These mortgages keep your payments unchanged even if the prime rate changes. However, if the prime rate increases, more of your payment will go toward interest and less toward the principal, potentially leading to negative amortization—where your principal balance may not decrease as expected by the end of the term.
When the prime rate decreases, your variable mortgage rate follows, resulting in lower interest costs. In this case, a greater portion of your payment is applied to the principal, which can help you pay off your mortgage faster and reduce the remaining balance at the end of the term.
How Does the Prime Rate Impact Fixed Mortgage Rates?
In the short term, changes to the prime rate in Canada have little direct impact on fixed mortgage rates. Fixed rates are primarily determined by the bond market, specifically the yields on Government of Canada (GoC) bonds. These bonds act as benchmarks for lenders when setting fixed rates, making them relatively insulated from immediate changes in the prime rate.
However, an indirect, longer-term relationship exists between the prime rate and fixed mortgage rates. The Bank of Canada’s policy rate adjustments directly influence the prime rate and often reflect its outlook on key economic indicators like inflation, GDP growth, and overall market stability. If markets anticipate that policy rate changes will persist, this can influence bond yields. For example, if the Bank of Canada implements multiple rate cuts, markets may expect a weaker economy and lower inflation, which could push down bond yields. In turn, this would lead to lower fixed mortgage rates.
Although bond yields are the primary driver of fixed mortgage rates, banks also consider their overall cost of funds when pricing these loans. Since the prime rate affects the cost of borrowing for financial institutions, a significant increase in the prime rate could prompt lenders to raise their fixed rates slightly to maintain profitability—even if bond yields remain stable.
While the prime rate does not have an immediate and direct effect on fixed mortgage rates, its influence on economic expectations and lender costs means it can indirectly shape fixed rates over time.
Prime Rate Relationship to the Bank of Canada Overnight Rate
All lenders in Canada set their prime rates, which are influenced by the Bank of Canada’s (BoC) overnight rate. However, not all lenders adjust their prime rates immediately when the BoC changes its policy rate. Depending on the lender’s policies and market dynamics, there can be a lag of a few days to a few weeks.
It’s important to note that lenders are not obligated to align their prime rates exactly with changes to the BoC overnight rate. However, competitive pressures typically encourage lenders to adjust their rates to align with their peers.
Lenders generally set their prime rate higher than the BoC’s policy rate— currently by 2.20%, though this can vary. This markup accounts for the additional costs and risks lenders face when providing credit products, including mortgages and lines of credit.
History of Prime Rates in Canada
Source: bankofcanada.ca
Bank of Canada Formed in 1935
The Bank of Canada (BoC) was established in Ottawa in 1935 and mandated to “regulate credit and currency in the best interests of the economic life of the nation.” Since its inception, the BoC has been pivotal in stabilizing the Canadian economy, particularly during crises such as the Great Depression. The BoC sets the target overnight rate, which lenders use to determine their prime rates. Although it can adjust this rate anytime, changes typically follow scheduled announcements 8 times yearly.
1935 – 1955: The Great Depression, World War II & Post War
The Great Depression and World War II profoundly impacted Canada’s economy, leading to criticism of the financial system. In 1935, the target overnight rate began at 2.5%, dropping to 1.5% in 1945 as the country recovered from the war. Canada’s significant contributions to supplying resources during WWII boosted its post-war economy. By the end of 1955, the overnight rate had stabilized at 2.0%.
1977 – 1991: Global Oil Crisis
After steady economic growth following WWII, Canada faced challenges during the late 1970s and early 1980s global oil crises. The target overnight rate reached an unprecedented high of 20.03% in 1981, driven by record oil prices and inflation caused by the OPEC oil embargo. As economic conditions improved, the rate gradually decreased, falling to 7.14% by March 1987.
1991 – 2008: Economic Recovery
Following the 1980s recession, the BoC introduced an inflation target rate in 1991 to ensure price stability. The target overnight rate generally decreased during this period, with minimal fluctuations. This era marked a significant shift in Canadian monetary policy, emphasizing predictable and stable inflation to support economic growth.
2009 – 2017: The Great Financial Crisis (GFC) and Oil Price Collapse
The 2008 financial crisis led to the BoC reducing the overnight rate to historic lows, falling below 1% and reaching 0.5% in 2009. A drop in global oil prices in 2014 contributed to a brief recession, leading to fluctuating rates that peaked at 1.25% before falling back to 0.75% in 2015. By 2017, economic conditions began to stabilize.
2018 – 2022: COVID-19 and Economic Uncertainty
Canada’s economy experienced strong growth following the 2008 financial crisis, but inflation in 2019 prevented the BoC rate from rising above 1.75%. The COVID-19 pandemic brought unprecedented economic uncertainty, leading the BoC to slash the overnight rate to 0.25% in early 2020. This historic low persisted through 2021 as reduced consumer spending and uncertainty about the pandemic’s trajectory weighed on the economy.
2022 – Present: Combating Sticky Inflation
As inflation surged in early 2022, the BoC took aggressive action to combat rising prices, increasing the overnight rate from 0.25% to 4.25% by the end of the year. In 2023, the rate rose further to 5.00%, where it remains today. These rate hikes reflect the Bank’s ongoing efforts to bring inflation back to its 2% target.
Canada Prime Rate Forecast
Inflation in Canada remains elevated, exceeding the Bank of Canada’s (BoC) target of 2%. Current projections suggest that inflation may persist at higher levels, potentially delaying the return to the 2% target due to a lower Canadian dollar foreign exchange rate against the USD.
Economists’ mortgage rates forecast now predicts that the BoC will unlikely reduce interest rates throughout 2025 as aggressively as initially expected. The rate cuts are expected to be gradual, with reductions of approximately 25 basis points per quarter. This cautious approach reflects the BoC’s focus on ensuring inflation remains controlled while supporting economic stability.
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