What Is the Present Bank of Canada Overnight Rate?
“What is the present Bank of Canada (BoC) overnight rate?” has been a common question ever since the bank hiked its rates for the eighth consecutive time in January of 2023.
The BoC bumped its overnight rate to an unbelievable 4.5% in January 2023 and confirmed it again in March 2023. However, policymakers claim increasing the rate is necessary to curb inflation, despite the public’s outrage at the highest rate hike in the last 15 years.
The BoC’s final goal is to bring the current inflation (5.2%) down to its original 2% level. However, the more realistic 2023 goal is decreasing the CPI to 3%.
Keep on reading as we look at the topic in detail!
What Is an ‘Overnight Rate’?
The overnight rate is the interest rate at which a country’s banks lend and borrow funds from each other in the overnight market. Since it applies to transactions between the most creditworthy institutions, it is the lowest available rate anywhere.
Known as the ‘Policy interest rate’ in Canada, the overnight rate controls the national monetary policies (including inflation) by influencing the consumer interest rates.
How the Bank of Canada Determines the Overnight Rate?
The process of lowering, increasing, or confirming the overnight rate occurs on eight fixed dates per year. The schedule for 2023 is as follows:
| 2023 Dates | Announcements |
| January 25 | Interest rate announcement and Monetary Policy Report |
| March 8 | Interest rate announcement |
| April 12 | Interest rate announcement and Monetary Policy Report |
| June 7 | Interest rate announcement |
| July 12 | Interest rate announcement and Monetary Policy Report |
| September 6 | Interest rate announcement |
| October 25 | Interest rate announcement and Monetary Policy Report |
| December 6 | Interest rate announcement |
source: bankofcanada.ca
As you can see, while the Bank of Canada issues their Monetary Policy Report (MPR) on a quarterly basis, setting the policy interest rate happens twice per quarter.
Members of the BoC Governing Council consider the country’s financial and economic conditions before making a decision on the target for the overnight rate.
However, note that the Council makes its rate decisions by consensus rather than individual votes, so every conflict must be resolved before going forward.
The main factors assessed at the meetings include but are not limited to the country’s GDP growth, international developments, current CPI inflation, the rate of employment, and other related economic factors.
While a rate increase makes borrowing more expensive, it helps curb inflation. On the other hand, rate reductions serve the consumer and stimulate the economy.
Once decided, the bank publishes its decision along with a brief explanation and the Monetary Policy Report (if available) via the official website.
Why Did the BoC Interest Rate Increase to 4.5% in 12 months?
The Bank of Canada had been implementing a 0.25% policy interest rate for a long period of time until the first +0.25% hike on March 2nd, 2022. Since then, the BoC has increased the rate at seven subsequent meetings to reach 4.5% on January 25th, 2023.
Thankfully, the 4.5% rate was kept unchanged on March 8th, 2023, as the economic developments predicted in January of the same year were well on track!
So what was the reason for the incredible hike of 4.25% in less than a year?
The main culprit for this steep increase in the overnight rate was the fast and excessive climb of the Total CPI inflation from 3.1% in June 2021 to 8.1% in June 2022—one of the most aggressive inflation hikes in the history of the country.
Owing to the timely response of the Bank of Canada, inflation simmered down to 5.2% in February 2023, with further anticipated decreases down to 3% by the middle of the year. Thanks to lower energy prices and global supply chain improvements, inflation is expected to come down to the standard of 2% in the following couple of years.
The original inflation hike (and subsequent increase of the overnight rate) resulted from global economic changes brought on by the pandemic and the war, which affected most lives across the globe, including the standard of living of Canadians.
Namely, the excess demand for various commodities, especially energy and agricultural goods, put upward pressure on their prices and created disruptions in the supply chain, which was evident from higher pump gas prices and higher costs of food items.
Moreover, since the economy fully reopened post Covid, the service sector also experienced unbelievable demand and, subsequently, inflation hikes. Combined with the continued price hike of goods, Canadians experienced one of the worst inflation hikes of 8.1%.
Why the BoC Kept the Rates Unchanged in March 2023?
The main reason the overnight rate was not increased for the ninth consecutive time this March 2023 is the evident inflation decrease resulting from the original hikes.
The current forecasts see inflation dropping further to reach 3% by the middle of 2023, so the overnight rate is expected to be confirmed (or even decreased) in April.
With its latest MPR (released in January), the bank’s Council indicated it would hold this rate as long as the anticipated economic developments stay on track, which proved true during their latest March meeting. However, the bank will continue assessing whether or not the economy is headed in the right direction when making each subsequent decision.
How Does the Overnight Rate Influence the Prime Rate?
The ‘Overnight rate’ and the ‘Prime rate’ are very closely connected, as the latter depends on the former. In other words, when the central bank (BoC) increases the overnight rate, thus making it more expensive for banks to lend to each other, they make up for that cost increase by bumping up the prime rates paid by their creditworthy customers.
Therefore, this increased cost is passed onto everyday citizens, who will see increased rates on all kinds of loans, including fixed and variable-rate student, home, personal, and auto loans, as they are inextricably linked to the bank’s prime rates.
Nevertheless, the prime rate does not always follow a one-to-one relationship with the overnight rate since other factors can also influence it, including changes in market conditions, the competition between lenders, and demand for loan products.
Conclusion
As of March 2023, the Bank of Canada employs a policy interest rate (overnight rate) of 4.5%, which is an all-time high in the last 15 years. However, this rate is not expected to experience any further hikes since its impact has started being felt by the national economy, as evidenced by the decrease in CPI inflation, so it may start to go down by the summer of 2023.
