Understanding our policy interest rate

At the heart of the Bank of Canada’s monetary policy is the target for the overnight rate. See what it is—and what it means for you.

The target for the overnight rate

At the Bank of Canada, the primary tool we use to control inflation is our target for the overnight rate—also called our policy interest rate. This is the starting point for setting many of the interest rates in the economy that matter for Canadians.

The overnight market

Every business day, Canada’s financial institutions move money back and forth among themselves for their customers. Whenever you use your debit card or send an e-transfer, money flows between financial institutions. At the end of each day, they need to settle all these payments. Some institutions may have sent out more in payments than they received, while others may have received more than they sent.

To balance out the payments, financial institutions can borrow money from each other for one day in the overnight market. The Bank sets a target for the interest rate we want financial institutions to charge each other when they make these overnight loans.

Deposit rate and bank rate

Financial institutions don’t have to borrow from each other to balance their payments—they can also use the Bank. They can deposit money with us at the deposit rate for one night or borrow money from us at the bank rate for one night.

The range between the deposit rate and the bank rate is called our operating band. It can vary in size.

Currently, the range is one-quarter of a percentage point wide, with the deposit rate equal to the target rate. This is called a floor system, because the target is at the floor of the operating band. In a floor system, if the Bank sets the policy interest rate at 2.25%, for example:

• the lower end of the range is also 2.25%—our deposit rate
• the higher end of the range is 2.5%—our bank rate

Before 2020, we generally kept the range one-half of a percentage point wide, with our policy interest rate sitting in the middle. This is called a corridor system. In a corridor system, if the Bank sets the policy interest rate at 2.25%, for example:

• the lower end of the range is 2%—our deposit rate
• the higher end of the range is 2.5%—our bank rate

What this means for you

The public doesn’t access this overnight market to borrow or lend money. Still, our policy interest rate and this market are important to you. By encouraging financial institutions to borrow and lend among themselves at close to the policy rate, the Bank affects interest rates on all kinds of other borrowing in the economy, including:

• the prime rate of commercial banks (used for loans such as mortgages and lines of credit)
• interest rates paid on deposits, guaranteed investment certificates and other savings

Why we change the target

If the economy is struggling to grow, it could pull inflation significantly below 2%. In response, we might lower the policy rate so that other interest rates across the economy go down. This means:

• People and businesses pay lower interest on loans and mortgages and earn less interest on savings.
• With lower rates, people tend to spend more, boosting the economy.

But if the economy is growing too fast, it could lead to rising inflation. So, we might raise the policy rate, which means:

• People and businesses pay higher interest on loans and mortgages. This discourages them from borrowing, reduces their spending and puts the brakes on inflation.
• With higher rates, people tend to save more and spend less, slowing down the economy.