The Bank of Canada (BoC) is Canada’s central bank, established to promote the country’s economic and financial welfare.
On March 12, 2025, the BoC reduced its key interest rate to 2.75%. These reductions help lower borrowing costs, which directly affect variable-rate mortgages, and also influence the pricing of longer-term fixed mortgages.
Understanding the Bank of Canada rate provides valuable insight for Canadian homeowners, prospective buyers, and anyone affected by changing interest rates in the Canadian market.
What is the Bank of Canada?
The Bank of Canada was established in 1935 following the Great Depression. The bank functions independently from the federal government while remaining accountable to Parliament through the Minister of Finance.
The Bank of Canada is responsible for formulating Canada’s monetary policy, regulating the financial system, issuing Canadian money, and managing foreign currency reserves. The Bank uses several tools to fulfill its mandate, the most prominent of which is its control of the target overnight rate, commonly known as the key policy rate.
What is the BoC Target Overnight Rate?
The target overnight rate, also called the key policy rate, serves as the central bank’s key mechanism for stimulating or slowing broader economic activity and inflation. The BoC directly impacts this rate daily to encourage banks to lend reserve balances to each other to meet regulatory requirements.
The key overnight rate shifts longer-term Government of Canada bond yields, impacting fixed-rate mortgages. Variable-rate mortgages move directly with prime rate changes tied to the BoC decisions.
The Overnight Market in Canada
Every day, banks come together to make offers to borrow and lend money in what’s called the overnight market. The interest rate they settle on for these short-term loans is the overnight rate. The Bank of Canada establishes a target for this rate and uses several mechanisms to keep the actual overnight rate close to this target:
- If the rate falls too low due to excess liquidity, banks can deposit their surplus funds with the Bank of Canada
- If the rate rises too high due to a cash shortage, the Bank of Canada is a lender of last resort.
Through this system, the Bank of Canada effectively maintains the overnight rate within a narrow band centred on its target rate, providing the foundation for all other interest rates in the Canadian economy.
How the BoC Sets Its Target Overnight Rates?
The BoC adjusts interest rates 8 times yearly based on evolving economic data. It targets national CPI inflation within a 1-3% band, promoting 2% inflation as the ideal level for maximizing employment and output growth. If consumer prices rise too quickly, the bank raises interest rates to cool economic activity and demand. When inflation drops too low, rate cuts aim to boost spending and production.
Latest BoC Policy Rate
The Bank of Canada’s key policy rate is 2.75%, with the last change in March 12, 2025. This represents a 0.25% reduction from the previous rate of 3.00%, following a rate announcement on March 12, 2025. This marks the seventh consecutive rate cut since the Bank began its easing cycle in June 2024, when the rate stood at 5.00%. Justifying for this move, the bank highlighted an inflation rate of 2.6% in February, aligned with its 1-3% target band.
Bank of Canada Rate History
The Bank of Canada has implemented the following rate changes over the past 2 years
| Effective Date | Overnight Rate | Change |
|---|---|---|
| March 12, 2025 | 2.75% | -0.25% |
| January 28, 2025 | 3.00% | -0.25% |
| December 10, 2024 | 3.25% | -0.50% |
| October 22, 2024 | 3.75% | -0.50% |
| September 3, 2024 | 4.25% | -0.25% |
| July 23, 2024 | 4.50% | -0.25% |
| June 4, 2024 | 4.75% | -0.25% |
| July 11, 2023 | 5.00% | +0.25% |
| June 6, 2023 | 4.75% | +0.25% |
| January 24, 2023 | 4.50% | +0.25% |
| December 6, 2022 | 4.25% | +0.50% |
| October 25, 2022 | 3.75% | +0.50% |
| September 6, 2022 | 3.25% | +0.75% |
| July 12, 2022 | 2.50% | +0.75% |
| May 31, 2022 | 1.50% | +1.00% |
The Bank’s rate cuts since mid-2024 have helped stimulate economic growth as inflation approached the target range. However, uncertainty surrounding potential U.S. tariffs on Canadian exports under the Trump administration continues to create economic headwinds that the Bank must navigate.
BoC Policy Rate Forecast for 2025-2026
The market expectations for the Bank of Canada’s interest rate path show a cautious approach to further rate cuts through 2025. Based on forward contracts on the Canadian Overnight Repo Rate Average (CORRA) as of March 28, 2025, financial markets anticipate:
| Announcement Date | Policy Rate at 2.75% | Policy Rate at 2.5% | Policy Rate at 2.25% |
|---|---|---|---|
| April 16, 2025 | 61% | 39% | – |
| June 4, 2025 | 24% | 76% | – |
| July 30, 2025 | – | 91% | 9% |
| September 17, 2025 | – | 60% | 40% |
| October 29, 2025 | – | 36% | 64% |
| December 10, 2025 | – | 24% | 76% |
Policy rate forecast from Canada’s Big 6 Banks
| Policy Rate | Q2 25 | Q4 25 | Q1 26 | Q4 26 | |
|---|---|---|---|---|---|
| BMO | 2.75% | 2.50% | 2.50% | 2.50% | Source |
| CIBC | 2.25% | 2.25% | 2.25% | 2.25% | Source |
| National Bank | 2.50% | 2.00% | 2.50% | 2.50% | Source |
| RBC | 2.25% | 2.25% | – | – | Source |
| Scotiabank | 2.75% | 2.75% | 2.75% | 2.75% | Source |
| TD Bank | 2.25% | 2.25% | 2.25% | 2.25% | Source |
3 factors influence the Bank’s rate decisions through 2025-2026
- Trade tensions with the United States: Donald Trump’s potential tariffs on Canadian exports create uncertainty that could slow economic activity.
- Structural inflation pressures: Several long-term factors may sustain inflation pressures, including:
- Reverse globalization and increased protectionism
- Energy transition costs and infrastructure investments
- Demographic shifts as the population ages in major economies
- Global economic conditions: Central banks worldwide are navigating similar challenges in balancing inflation control with economic growth.
The Bank of Canada is now facing the challenge of balancing its inflation mandate against supporting the economy through potential trade disruptions. In recent appearances, Governor Tiff Macklem has emphasized that the Bank remains focused on controlling inflation and proceeding carefully with future rate decisions.
Bank of Canada Rate FAQs
Why is the key rate important?
It is the BoC's primary mechanism for stimulating or slowing the economy and consumer price growth based on evolving conditions.
How do BoC rate changes impact Canadians?
The BoC key rate influences business and household borrowing costs, variable-rate mortgages, and broader prices for goods and services.
Why doesn't the Bank of Canada use negative interest rates?
The Bank of Canada has been reluctant to implement negative rates for several reasons: 1. Potential market disruption: Negative rates can create distortions in financial markets and banking systems. 2. Limited effectiveness: The experience of other countries suggests negative rates may have limited effectiveness in stimulating economic activity. 3. Banking system challenges: Banks may find it difficult to pass negative rates on to retail customers, potentially squeezing profit margins and destabilizing the financial system. 4. Alternative tools available: The Bank has other tools available, such as quantitative easing (asset purchases), forward guidance, and targeted lending programs. While the Bank has maintained that negative rates remain in its toolkit, it views them as a last resort rather than a preferred policy option.
How do BoC decisions relate to the US Federal Reserve?
As key trading partners, interest rate changes from the Fed and BoC often align directionally, but the timing and magnitude can differ based on each nation's economic needs.
The Bottom Line
Seven consecutive policy rate cuts since mid-2024 represent a significant shift from the peak rate of 5.00% maintained through much of 2023 and early 2024. The rate reduction cycle reflects moderating inflation, which has approached the Bank’s 2% target. Looking ahead, financial markets anticipate further modest rate cuts through 2025.
The current rate environment offers improved affordability for Canadian homeowners and prospective buyers compared to recent years. Individual mortgage decisions should always consider personal financial circumstances, risk tolerance, and long-term financial goals.
