Let’s look together and take stock of the evolution of the Bank of Canada’s key interest rate over the past ten years and its impact on the Canadian economy.
Key interest rate: definition and role
The key interest rate is a monetary tool used by central banks to influence short-term interest rates and thus control inflation and guide economic growth. In Canada, it is the Bank of Canada that establishes this rate after periodic meetings of its monetary policy committee.
Impact on the economy
A variation in the key interest rate can have important consequences for a country’s economy. In general, a decrease in the key interest rate stimulates the economy by facilitating access to credit for businesses and households, while an increase helps to curb inflation.
The main impacts of the key interest rate are:
- on interest rates for loans (including mortgage loans) and borrowings
- on business investment decisions
- on household spending
- and indirectly on inflation and economic growth
Notable evolutions of the key interest rate over the past 10 years
The key interest rate has experienced notable fluctuations over the past decade, mainly related to the global economic situation as well as inflation and growth in Canada.
| Date | Overnight target rate | Change from last date |
| June 1, 2010 | 0.50% | |
| July 20, 2010 | 0.75% | + 0.25 points |
| September 8, 2010 | 1.00% | + 0.25 points |
| January 21, 2015 | 0.75% | – 0.25 points |
| July 15, 2015 | 0.50% | – 0.25 points |
| July 12, 2017 | 0.75% | + 0.25 points |
| September 6, 2017 | 1.00% | + 0.25 points |
| January 17, 2018 | 1.25% | + 0.25 points |
| July 11, 2018 | 1.50% | + 0.25 points |
| October 24, 2018 | 1.75% | + 0.25 points |
| March 4, 2020 | 1.25% | – 0.50 points |
| March 13, 2020 | 0.75% | – 0.50 points |
| March 27, 2020 | 0.25% | – 0.50 points |
| March 2, 2022 | 0.50% | + 0.25 points |
| April 13, 2022 | 1.00% | + 0.50 points |
| June 1, 2022 | 1.50% | + 0.50 points |
| July 13, 2022 | 2.50% | + 1 points |
| September 7, 2022 | 3.25% | + 0.75 points |
| October 26, 2022 | 3.75% | + 0.50 points |
| December 7, 2022 | 4.25% | + 0.50 points |
| January 25, 2023 | 4.50% | + 0.25 points |
| June 7, 2023 | 4.75% | + 0.25 points |
| July 12, 2023 | 5.00% | + 0.25 points |
| September 6, 2023 | 5.00% | 0 points |
| October 25, 2023 | 5.00% | 0 points |
| December 6, 2023 | 5.00% | 0 points |
Period 2013-2019: stability and slight increases
Between 2013 and 2016, the key interest rate remained stable at 1%. However, faced with moderate inflation and weak economic growth, the Bank of Canada decided to lower this rate twice in 2015. Subsequently, it gradually increased it until 2018, reaching a peak of 1.75% in October of that year.
2020: spectacular drop due to the Covid-19 crisis
The Covid-19 pandemic had major repercussions on the global economy, causing a sharp drop in demand, rising unemployment, and increased commercial tensions. Faced with this context, the Bank of Canada proceeded from March 2020 with three consecutive decreases in its key interest rate, bringing it from 1.75% to only 0.25%, its lowest level since the 2008 financial crisis.
2021: maintaining
Since the beginning of 2021, the Bank of Canada has maintained its key interest rate at 0.25% to stimulate economic recovery and help reduce the effects of the pandemic on employment and inflation. However, inflationary concerns and the gradual recovery of growth could push the central bank to consider raising this rate in the near future.
2022: the surprise
In 2022, the Bank of Canada began increasing its key interest rate in March, going from 0.50% to 3.25% in September 2022. This increase was explained by a high inflation rate, reaching 8.1% in June 2022, its highest level in 30 years. The Bank of Canada continued to increase its key interest rate several times throughout the year to fight inflation.
2023, high inflation maintaining a high key interest rate
In 2023, the Bank of Canada slowed the increase in the key interest rate to finally maintain it at 5%, despite slight signs of economic and inflation slowdown. The Bank of Canada maintained its key interest rate at this level because it kept its goal of 2% inflation for 2025.
and for 2024?
For 2024, the dates of the next announcements on the key interest rate have been communicated:
- Wednesday, January 24
- Wednesday, March 6
- Wednesday, April 10
- Wednesday, June 5
- Wednesday, July 24
- Wednesday, September 4
- Wednesday, October 23
- Wednesday, December 11
Source: https://www.banqueducanada.ca/2023/07/calendrier-2024-annonces-taux-directeur-grandes-publications/
Consequences on the Canadian economy
The evolution of the key interest rate has had varied consequences on different sectors of the Canadian economy:
- Inflation: despite the drop in prices of certain services and products since September 2023, Canadians still perceive inflation as being strong
- Real estate market: the combination of several factors, including the low key interest rate, led to a slowdown in residential sales in Montreal last October
- Employment: job losses related to the pandemic were compensated in part by financial support measures implemented by the government, but unemployment remains high
- Economic growth: although Canada is gradually recovering from the health crisis, growth remains weak compared to previous years.
To conclude, it will be interesting to follow the evolution of the Bank of Canada’s key interest rate in the months and years to come, particularly due to the uncertainties that still weigh on the global economy and the challenges represented by controlling inflation and sustainable growth recovery. Moreover, it is not easy to make mortgage rate predictions as it is subject to interpretation.