22 April 2024

Unlocking The Dynamics of Interest Rates in Canada

Understanding the dynamics of Canadas Interest Rates is crucial in making Educated financial decision that affect all aspects of your personal finances.

Most notably, Rate Decisions by the Bank of Canada have implications that are likely to affect your real estate buying/selling decisions as well as the management of  your real estate asset portfolio.

Let’s begin with the basics.

Who is The Bank of Canada and why does it govern interest rates decisions?

The Bank of Canada (BOC for short or The Bank) is a Central Bank established in 1934 responsible for key functions of maintaining  Canadian economic stability and supporting the value of Canadian dollar.

The Bank of Canada maintains monetary policy meaning it sets the overnight interest rate which in turn affects borrowing costs on all types of loans and lenders consumer products (such as home mortgages).

Decisions of Bank of Canada affect every aspect of economy and it’s decisions greatly affect the overall economic stability of the country.

The Bank of Canada has it’s headquarters in Ottawa, Ontario and it’s close proximity to key political and government organizations.

The Role Of BOC in Canadian Economy and Regulation of Interest Rates

One of the most important roles of bank of Canada is issuance of paper money. The Bank controls, prints and oversees flow of Canadian currency.The quantity of money printed and it’s distribution is closely monitored and regulated along with other banking institutions and credit unions to ensure adequate supply based on current economic conditions.The Bank also replaces old and outdated banknotes as well as oversees implemented anti counterfeit policies .

Money Printing and Interest Rates

Money printing, also known as QE (Quantitive Easing)  has a major impact on Canadian Interest Rates via several factors and banks objectives.

When The Bank prints more money and injects more liquidity in the economy, borrowing costs on mortgages and investments tend to go down. This is part of economic stimulation by the increase  of money available for bowing and is known as Quantitive Easing.

Via the system of money production, The Bank purchases long term government securities and assets which in turn drives up their prices.This action stimulates investment consumption and supports economic growth (expansion).

Quantitive Easing in turn affects Inflation Expectations because when investors anticipate higher inflation due to higher amounts of money being printed, they are likely to demand higher interest rates to compensate for lowering of purchasing power.

If inflation expectations remain intact the rates are likely to stay put as well.

It’s important to note, Excessive money printing can lead to overall currency depreciation.

Who governs The Bank of Canada Interest Rates Decisions?

Decisions of The Bank of Canada are overseen by it’s governing council but The Bank is ultimately accountable to Parliament of Canada.

While the public doesn’t actively participate or influence the decisions of The Bank of Canada there are Chanels through which public can engage with monetary policy decision makers.

The Bank of Canada publishes a wide variety of reports and publications which are open for commentary and discussion via it’s website and press release and other public communication Chanels. The Bank also conducts surveys and gets public input from various public forums on specific issues. The Bank may also use social media to share it’s updates concerning its policy and interest rates changes.

The Bank of Canada rates decisions are announced 8 times per year at regular intervals. During the period of 6 weeks in between announcements the economy is closely monitored and its health is assessed to appropriately adjust the monetary policy. The schedule is available on BOC Website and is highly anticipated by the entire country, especially during the time of Quantitive Tightening.

How does this affect your Mortgage interest rate?

Variable VS Fixed Mortgage Interest Rates

When the Bank of Canada announces its decision, mortgage lenders adjust their borrowing rates in response. Variable rate mortgages are greatly influenced by the The Bank of Canada overnight rate which causes them to increase or decrease based on the prime rate fluctuations.

The borrowers using Variable Rates products are exposed to more rate fluctuation risk because the tone is set so closely By The Bank. If the interest rates rise the borrowers payments will increase which makes it more challenging for financial planing and budgeting. However, if the rates drop this can be a favourable circumstance for the borrower allowing faster debt repayment and lower rates.

Fixed rate mortgages are not immediately affected by The Banks decision as they are locked into terms during which their rates must remain unchanged. However, fixed mortgages are likely to have future rate increases on new contracts if the government signals potential higher inflation and consequential shift in interest rates decisions.

It’s important to note The lenders still have flexibility to set their own interest rates based on business strategies, market positioning and competitive pressures within the borrowing industry.

USA Federal Reserve Policy and Canadian Interest Rates Connection

Federal reserve or The Fed is central banking system of United States established in 1913.The Fed has authority to control monetary policy just like The Bank and it’s decisions are crucial in availability and cost of borrowing.The fed supervises money printing, oversees major banks operations and safeguards the stability of USA banking system.

The Feds monetary policy indirectly influences Canadian Central Banks decisions in several ways.

Due to the scope of influence and size of USA economy any rate decision made by The Fed immediately influences local and international financial markets. Changes in fed rate affect investor confidence, appetite for risk and global capital flow.

Shift in The fed rates decisions  influences Canadian borrowing markets as out economies and trade are so closely tied. Most notable influence is impact on Canadian Currency exchange between the USA dollar and Canadian Dollar.

When The fed increases rates to attract money flow into USA, this strengthens the US dollar, which in turn devalues Canadian Currency. The Bank of Canada in return has to adjust it’s sails to stabilize the currency and maintain exchange stability.

Higher interest rates in USA will impact the cost of import of goods in Canada and will lead to slower economic growth in Canada. The Bank of Canada is in constant balancing act between the USA economic growth and its domestic economic stability.


us dollar abraham lincoln interest rates

What is the Canadian Interest Rates outlook for 2024?

Canadian domestic economic growth and inflation will greatly influence The Banks further rates decisions.Stronger growth is likely to support The Banks increase of overnight lending rate and vice versa.

If inflation persists The Bank may decide to continue to increase rates or maintain them at current levels to further cool down the economy. Target inflation of around 2% will support  rates stability and is likely to signal lower borrowing costs in the near future.

The next scheduled rate target announcement is on June 5 2024.

There is an overall expectation that The Bank will have its first rate cut later this year, in line with USA Fed Rate Decision as well as domestic inflation conditions.

Current inflation sits at 2.8 precent which is getting closer to 2% optimal target range.

While remaining conservative on its outlook, The Bank has signalled that the lowering of interest rates will not be as rapid as its increase. The main concern of The Bank is increase In shelter costs as they are currently 6.5% higher then the same time last year. Mortgage Rates and Rents are the main contributing factors and as such delay the return of target inflation.


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