What is the Bank of Canada Prescribed Rate?

The Bank of Canada Prescribed Rate, also known as the Bank Rate or the key interest rate, is the benchmark interest rate set by the Bank of Canada. It is the rate at which the central bank lends money to Canada’s chartered banks and other financial institutions on short-term loans. This rate plays a crucial role in influencing the overall level of interest rates in the Canadian economy.

The Bank of Canada sets the Prescribed Rate with the objective of achieving the country’s monetary policy goals, which primarily include controlling inflation and promoting economic stability and growth. By adjusting the Prescribed Rate, the central bank can influence borrowing and lending costs for businesses and consumers, impacting spending, investment, and overall economic activity.

The Prescribed Rate serves as a reference point for commercial banks when determining the interest rates they charge on loans, mortgages, and other financial products. When the Bank of Canada lowers the Prescribed Rate, it generally encourages borrowing and spending as it becomes cheaper to access credit. Conversely, when the central bank raises the rate, it can discourage borrowing and spending, helping to control inflationary pressures.

As of my last update in September 2021, the Bank of Canada’s Prescribed Rate was subject to change over time based on the economic conditions and monetary policy decisions. For the most current information on the Bank of Canada’s Prescribed Rate, I recommend checking the official website of the Bank of Canada or reputable financial news sources.

Why does the Bank of Canada raise or lower the Prescribed Rate?

The Bank of Canada raises or lowers the Prescribed Rate primarily to achieve its monetary policy objectives, which are aimed at promoting economic stability, controlling inflation, and fostering sustainable economic growth. The central bank uses the Prescribed Rate as a tool to influence borrowing and lending costs in the economy, thereby affecting spending, investment, and overall economic activity. Here are the main reasons why the Bank of Canada may raise or lower the Prescribed Rate:

1. Controlling Inflation: One of the primary mandates of the Bank of Canada is to maintain price stability. Inflation refers to the general increase in the price level of goods and services over time. By raising the Prescribed Rate, the central bank aims to reduce borrowing and spending in the economy, which can help curb inflationary pressures. Higher interest rates can lead to reduced consumer spending and business investment, which, in turn, can help slow down price increases.
2. Economic Growth: The Bank of Canada also seeks to support sustainable economic growth. In times of economic slowdown or recession, the central bank may lower the Prescribed Rate to encourage borrowing and spending, stimulate business investment, and boost overall economic activity. Lower interest rates can make credit more affordable, leading to increased consumer spending and increased business investment.
3. Exchange Rate Management: The Prescribed Rate can also influence the exchange rate of the Canadian dollar. When the central bank raises interest rates, it can attract foreign investors seeking higher returns, leading to an appreciation of the Canadian dollar. Conversely, lower interest rates can lead to a depreciation of the currency, which can benefit exporters.
4. Financial Stability: The Bank of Canada also considers financial stability when setting interest rates. Extreme fluctuations in interest rates could lead to financial market instability, affecting asset prices, investment decisions, and overall market sentiment. The central bank aims to strike a balance to ensure a stable financial environment.
5. Global Economic Conditions: The Bank of Canada takes into account international economic conditions, including global growth trends and financial market developments. Changes in global economic conditions can influence domestic economic performance and inflationary pressures.

The decision to raise or lower the Prescribed Rate is made by the Bank of Canada’s Governing Council, which meets at regular intervals to assess economic data and consider various factors that may impact the economy. The central bank communicates its interest rate decisions to the public through official statements and press conferences, providing transparency and guidance to market participants and the public.