Understanding the Role of the Bank of Canada (BoC)

Tina Kha
May 15
4 min read

Updated: Jun 10

To put it simply, the Bank of Canada (BoC) creates and lends money to banks at what’s called the Overnight Lending Rate (or Key Interest Rate). This is the rate banks pay to borrow money.

One of the BoC’s primary responsibilities is managing inflation in Canada. It does this by adjusting the Overnight Lending Rate:

If inflation is too high, the BoC raises rates to make borrowing more expensive. This slows down spending and curbs inflation.
If inflation is too low, the BoC lowers rates to encourage borrowing. This stimulates economic growth.

Currently, the BoC is focused on keeping inflation around 2%. However, rate changes often take months to impact inflation. Today’s inflation numbers reflect decisions made last spring. Likewise, today’s rate announcement will shape economic conditions next spring. This means the BoC must make forward-looking decisions—based on expert forecasts, but still with a fair amount of uncertainty.

How This Affects Consumers

The Overnight Lending Rate affects the prime rate. While influenced by BoC decisions, the prime rate is set individually by each lender. This means:

Not all lenders have the same prime rate. They may apply different rates across products.
A rate discount from one lender might seem better than another but could result in a higher overall rate if that lender's prime rate is higher.

Prime Rate and Lending Products

Many financial products are tied to the prime rate, including:

Savings accounts (influencing the interest you earn)
Lines of credit (e.g., prime + 2.00% for unsecured lines)
Variable-rate mortgages (e.g., prime - 0.85%)
Home Equity Lines of Credit (HELOCs) (e.g., prime + 0.50%)

These products are often expressed as a premium or discount to the prime rate. As the prime rate changes, so do the interest rates on these products, affecting interest payments accordingly.

Timing of Prime Rate Adjustments

Since lenders set their own prime rates, adjustments after a BoC announcement can vary:

Some lenders change rates immediately after an announcement.
Others adjust rates within a few days or align changes with scheduled payment dates.

Adjustable Payment Variable-Rate Mortgages

Your monthly payment fluctuates with changes in the Prime Rate.
If the BoC increases rates, your payment goes up. If it decreases rates, your payment goes down.

Fixed Payment Variable-Rate Mortgages

Your payment stays the same, but the portion going toward interest vs. principal shifts.
If rates rise, more of your payment goes to interest, so you pay off less principal each month.
If rates drop, more of your payment goes toward paying down the mortgage faster.

So, depending on your mortgage type, a BoC rate announcement may or may not impact your monthly payment.

The Big Misconception: Fixed Mortgage Rates and the Bank of Canada

A major misconception I see every time the BoC announces a rate change is that fixed mortgage rates are affected. This is not true.

When people see headlines like “Rates Are Dropping!”, they often assume this applies to fixed mortgage rates. So, if the BoC doesn’t set fixed mortgage rates, what does?

Fixed Mortgage Rates and the Bond Market

Fixed mortgage rates are based on the Canadian bond market, specifically bond yields.

For example, 5-year fixed mortgage rates are influenced by 5-year Government of Canada bond yields. These yields fluctuate daily based on:

Inflation numbers
Employment data (Canada & U.S.)
Investor confidence
Global events (e.g., U.S. elections, geopolitical risks, economic outlooks)

While the bond market and the BoC often react to the same economic conditions, fixed mortgage rates do not directly follow BoC rate changes. For example, if inflation data shows inflation dropping below target, bond yields might fall in anticipation of a BoC rate cut—before the BoC even makes an announcement. In contrast, when the BoC officially lowers rates, fixed mortgage rates may not change at all because the bond market already priced in that expectation.

How to Choose Between Fixed and Variable Rates

One of the most common questions I get is: “Should I go with a fixed or variable rate?”

Unfortunately, no one has a crystal ball to predict future rates, but here’s my best advice:

✔ Make a decision based on today’s information, not speculation.

✔ Consider the long-term nature of a mortgage. You’ll likely go through 5–8 renewals over the life of your mortgage. Rates will fluctuate over time—sometimes you’ll “win,” and sometimes you won’t.

✔ Assess your personal risk tolerance. If you’d lose sleep over rate fluctuations, a fixed-rate mortgage might be better. If you’re comfortable with potential rate changes, a variable rate might save you money.

✔ Factor in potential penalties. Breaking a fixed-rate mortgage can come with significant costs, whereas variable-rate penalties tend to be lower. If you might need to refinance or sell early, this is crucial to consider.

The Bottom Line

When it comes to mortgage rates, not all loans are affected by the Bank of Canada’s decisions. If you’re in a fixed-rate mortgage, a BoC announcement won’t impact your existing payment. If you’re in a variable-rate mortgage, it depends on how your lender structures payments.

As always, if you’re unsure about what’s best for you, speak with a mortgage broker (like me!) who can help you navigate the options based on your unique situation.