Prime Rate In Canada: What Is The Prime Rate And How Is It Set?

The prime rate or prime lending rate is what Canadian banks and financial institutions use to set the interest rate on their variable interest products, such as loans, lines of credit or variable-rate mortgages. Consider it the baseline rate—meaning the rate they offer a specific customer can be higher (but not lower) than the prime rate based on creditworthiness and a number of other factors.

Before the increase in interest rates started last year, the prime rate remained under 4% for more than a decade. However, rates have increased dramatically since March 2022 because the Bank of Canada is trying to keep inflation from rising too quickly and prevent the economy from overheating.

Here’s a look at how the prime rate has changed since 2018:

• June 6, 2024: 6.95%
• July 12, 2023: 7.2%
• June 8, 2023: 6.95%
• Jan. 25, 2023: 6.7%
• Dec. 8, 2022: 6.45%
• Oct. 27, 2022: 5.95%
• Sept. 8, 2022: 5.45%
• July 14, 2022: 4.7%
• June 2, 2022: 3.7%
• April 14, 2022: 3.2%
• March 3, 2022: 2.7%
• March 30, 2020: 2.45%
• March 17, 2020: 2.95%
• March 5, 2020: 3.45%
• Oct. 25, 2018: 3.95%
• July 12, 2018: 3.70%

Related: Prime Rate History In Canada

The prime rate is influenced by the Bank of Canada’s target for the overnight rate. This rate also can be called the key interest rate or the policy interest rate.

When the central bank decides to change this rate, it’s an indication of what direction it wants short-term interest rates to move in. After the Bank of Canada raises or lowers the key interest rate, large financial institutions typically change their prime rate the following day by the same number of basis points.

The Bank of Canada says it sets the key interest rate “at a level that will keep inflation low, stable, and predictable over the medium term.” Inflation peaked at an annual rate of 8.1% in June 2022 and currently sits at 2.9% as of May 2024. However, before cutting rates the central bank wanted inflation to be closer to 2%.

On June 5, 2024, the Bank of Canada finally cut its key overnight rate from 5% to 4.75%.

“Restrictive monetary policy is working to relieve price pressures. And with further and more sustained evidence underlying inflation is easing, monetary policy no longer needs to be as restrictive,” noted Bank of Canada Governor Tiff Macklem. “In other words, it is appropriate to lower our policy interest rate.”

The Bank of Canada typically makes interest rate announcements on fixed dates eight times a year. Each time, the central bank will decide whether to raise, lower or hold its overnight rate. However, there have been some emergency announcements over the past couple of decades. The most notable ones have been shortly after the pandemic was declared in March 2020, during the global financial crisis in 2008 and soon after the 9/11 terrorist attacks in 2001.

The prime rate is set by financial institutions and the overnight rate is set by the Bank of Canada. Financial institutions will usually raise or lower the prime rate by the same amount as the change in the overnight rate.

For example, when the Bank of Canada raised the overnight rate by 25 basis points to 5% from 4.75% on July 12, 2023, financial institutions increased the prime rate by 25 basis points to 7.2% from 6.95%. And when the Bank of Canada cut rates for the first time in four years on June 5, 2024, the banks responded by cutting the prime rate to 6.95%.

The prime rate is always higher than the overnight rate. Currently, the prime rate (6.95%) has a percentage difference of 2.2% from the overnight rate (4.75%).

The prime rate affects all borrowers of different financial products. Here’s a quick overview.

Mortgages

The change in the prime rate will affect those with a variable-rate mortgage. The mortgage rate is typically prime minus a certain percentage (for example, prime minus 0.5%). If the prime rate goes up by 25 basis points, that means your mortgage rate will go up by 25 basis points. As a result,  the amount of your mortgage payment that goes towards paying interest will increase or your payment will rise. If you have a fixed-rate mortgage, the change in the prime rate won’t affect you.

Lines of credit

A line of credit is typically the prime rate plus a certain percentage (such as prime plus 3%). When the prime rate goes up or down, the interest rate on your line of credit will also increase or decrease.

Loans

If you’re buying a vehicle, some financial institutions offer you the option of getting a fixed or variable rate. The change in the prime rate will affect the amount of interest you pay if your rate is variable.

Credit cards

Financial institutions that offer low-interest or small business credit cards will have a rate of prime plus a certain percentage. Your interest rate will rise or fall depending on which way the prime rate goes.

While the rate on credit products has risen significantly as the prime rate has increased, the rates on high-interest savings accounts haven’t increased very much at the big banks. This is partly due to consumers being more comfortable with a well-known brand and not shopping around for better rates.

Even smaller banks haven’t been raising interest rates on their high-interest savings accounts very quickly. EQ Bank, for example, has kept its base earn rate at 2.5% on its regular savings account since October 2022 even though the prime rate has increased by 1.5 percentage points since then. (EQ is currently offering a bonus interest rate of 1.5% for new customers who set up automatic and recurring direct deposits.)

Looking at GICs, the national average APY for a one-year GIC is currently 4.0%, down 10.11% year-over-year. In April 2022, the average one-year GIC APY was 1.25%.

The prime rate is influenced by the Bank of Canada’s interest rate decisions. If the prime rate rises, it’s usually bad for borrowers and good for savers. But it’s often good for borrowers and bad for savers if the prime rate declines.