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Bank of Canada Interest Rates and Inflation
The Bank of Canada sets interest rates in order to try to keep inflation at 2%, with an "inflation-control range" of 1% to 3%. The rate of inflation is measured using the 12-month rate of change in the consumer price index produced by Statistics Canada.
Target Overnight Rate
The Bank of Canada rate that is quoted in the press is actually the target overnight rate. The Bank of Canada takes deposits and lends money on a one-day basis from and to financial institutions. The rate that the Bank of Canada pays to financial institutions for funds on deposit for one night is called the deposit rate. The rate at which they can borrow money from the BOC for one night is called the bank rate. When the financial institutions borrow and lend funds on a one-day basis among themselves, they usually use the overnight rate. The overnight rate can vary from the target overnight rate, but will stay within the rates paid and charged by the Bank of Canada, the range of which can vary.
See the recent target overnight rates on the Bank of Canada website.
The Bank has a system of eight fixed dates each year on which it announces whether or not it will change the policy interest rate.
Trying to Control Inflation
If inflation is rising too fast, the Bank of Canada will increase the target overnight rate. This will cause an increase in other interest rates charged to consumers, which should result in a reduction in borrowing and spending, which will slow down inflation. If inflation is rising too slowly, the Bank of Canada will reduce the target overnight rate. This will cause a reduction in other interest rates, which should result in an increase in borrowing and spending, stimulating the economy. See Can the Canadian Government Print Money and Spend it?, which includes information on how the Bank of Canada works, and on the Canadian money supply.
Bank Prime Rate
The bank prime rate is the interest rate charged by financial institutions to their best, or most creditworthy, customers. The prime rate normally varies as the BOC target overnight rate varies. The bank rates for different types of loans are based on the prime rate.
Consumer Price Index Information
Revised: September 06, 2022
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