What Is the Bank of Canada Overnight Rate and How Does It Work?

When was the last time you watched the news and saw a feature about the Bank of Canada raising or cutting interest rates? These announcements happen regularly. Yet, for many Canadians, the discussion can feel confusing. Interest rates clearly matter, but the terminology surrounding them is not always easy to understand.

In this guide, we’ll discuss what the Bank of Canada’s overnight rate is, how it works, and why it matters for the broader economy. Understanding these changes can help you interpret financial news and how shifts in monetary policy might affect your wallet.

What Is the Overnight Rate?

The overnight rate is the main policy interest rate used by the Bank of Canada (BoC) to guide monetary policy in Canada. This policy represents the rate that the biggest banks in Canada and other financial institutions use when lending and borrowing funds from each other overnight.

Within Canada’s banking system, financial institutions lend money to each other, settling their accounts at the end of the day. As the Bank of Canada explains, “to balance out the payments, financial institutions can borrow money from each other for one day in the overnight market.” The interest rate on these loans tends to stay close to the Bank of Canada’s target overnight rate, which is also known as its policy rate. For up-to-date information on the BoC’s current policy interest rate, you can check their website directly.

How the Bank of Canada Sets the Overnight Rate

As part of its monetary policy decisions, the BoC makes changes to its overnight rate. They announce these changes according to a structured meeting schedule. During these meetings, the Bank’s Governing Council reviews a wide range of economic data including the following:

• Current inflation rate based on the Consumer Price Index (CPI)
• Trends in the rate of price growth
• Employment conditions in the country
• Consumer spending
• Economic growth as represented by Gross Domestic Product (GDP)
• Global financial developments

Each of these factors either influences inflation or responds to changes in it. Inflation, in turn, is impacted by the BoC’s monetary policy.

The Bank’s monetary policy goal is “to try and keep inflation low, stable and predictable,” which means keeping it “close to the targeted rate.” As of 2026, the BoC “aims to keep inflation at the 2 per cent midpoint of an inflation-control target range of 1 to 3 per cent.” Keeping inflation stable helps create an environment where businesses can invest and expand while households can plan their spending. This helps support sustainable economic growth over time.

By adjusting the overnight rate in response to changing economic conditions, the central bank aims to maintain price stability while supporting sustainable economic growth.

Why the Bank of Canada Raises Interest Rates

When inflation, also known as the rate of price growth, begins to rise too quickly, policymakers at the central bank can raise the overnight rate in order to slow economic activity. Higher interest rates make taking out loans more expensive for both businesses and households, in turn slowing borrowing. As Canadians borrow less, consumer spending and investment typically cool down as well. This occurrence helps reduce pressure on prices and brings inflation closer to the Bank’s target.

Why the Bank of Canada Lowers Interest Rates

What happens if inflation is low and economic growth is slow? In that case, the BoC may choose to lower the overnight rate. This is because lower rates will reduce the borrowing costs across the financial system, and loans become cheaper for both consumers and businesses. Cheaper borrowing means consumers are willing to spend more and companies may increase investment. When this happens, it can help to stimulate growth and support employment in the country.

How the Overnight Rate Affects Other Interest Rates

As you can see from the examples above, when the Bank of Canada raises or lowers its policy rate, the effects spill over throughout the broader financial system. It happens first at the commercial bank level. After the BoC adjusts its overnight rate, Canadian banks typically choose to adjust their prime lending rate as well. The rate acts as a benchmark commercial banks use when pricing lending products such as:

• Variable-rate mortgages
• Lines of credit
• HELOCs
• Variable-rate business loans

Often, variable-rate products are at a rate of “prime plus” or “prime minus” a certain percentage. When prime rates change, the borrowing costs, and sometimes savings rates, change as well.

How the Overnight Rate Affects Canadians

Changes to the overnight rate do not stay inside the banking system for long, as they influence many financial products that Canadians use every day. Here is how the Bank of Canada’s overnight rate and interest rate decisions eventually affect mortgages, loans, savings accounts, and consumer spending across the country.

Mortgages

Variable rate mortgages usually react the quickest. Because these loans have prices related to a bank’s prime rate, mortgage payments and interest costs can rise when the Bank of Canada raises its overnight rate. When the central bank lowers its rate, though, variable mortgage costs may fall.

Fixed-rate mortgages are a different story. The underlying mortgage rate on your fixed mortgage will typically stay the same for the duration of your mortgage term. However, the rate available when you renew your mortgage or acquire a new one may change depending on market interest rates.

Loans and credit cards

Other borrowing products can also see their rates change. Lines of credit, personal loans, and even some business loans will track the prime rate. This means their interest costs change when a bank changes its overnight lending rates.

How credit card interest works in Canada is a little different, though. Most credit cards have fixed interest rates, so they don’t change automatically when the BoC adjusts its policy rate. However, the broader interest rate environment still influences credit card rates over time.

Savings accounts

Changing interest rates may impact savings as well. When borrowing costs rise, banks sometimes increase the interest they offer on deposits like savings accounts and GICs. But, if the overnight rate falls, the major banks may slash their savings rates, reducing the return savers make on deposits in the process.

Consumer spending

As borrowing becomes more expensive, some households and businesses reduce spending on major purchases. Some even cut back on day-to-day purchases. This is because when loans cost more, it eats up a larger portion of the budget. It means there is less money leftover for larger items like homes and vehicles, or even smaller discretionary purchases. Companies may also postpone expansion projects. Over time, this helps slow inflation and stabilize the economy.

Imagine instead that borrowing becomes cheaper because the Bank of Canada cuts its overnight rate. In that case, households and businesses may see smaller interest charges, meaning they have more money left over to spend. It can spur investment in major purchases like homes, vehicles, factories, or renovations. Even daily purchase activity may pick up, supporting the economy and boosting job growth. But stronger spending can also increase demand, pushing prices and, in turn, inflation higher.

Overnight Rate vs Prime Rate: What’s the Difference?

While they may seem similar, the overnight rate and the prime rate are two different types of interest rates. They are closely related, though.

The Bank of Canada sets the overnight rate which is the interest rate that major financial institutions use for lending and borrowing funds between themselves. The BoC changes the target on this rate as part of its monetary policy. Canadian commercial banks, on the other hand, are in charge of setting the prime rate. The prime interest rate is the baseline interest rate that the financial institutions in Canada use for lending money to their customers.

When the BoC adjusts its overnight rate, Canadian banks often change their prime rates as well. It’s because of this relationship that changes to the overnight rate often lead to higher or lower borrowing costs for Canadian consumers and businesses.

Understanding the relationship between the overnight rate and the prime rate can help Canadians better interpret interest rate news and see how changes from the Bank of Canada can affect their finances.