Overnight rate

The overnight rate is influenced by various factors within the monetary policy framework. Central bank decisions primarily drive the rate, adjusting it to achieve goals like controlling inflation or stimulating growth. Key economic indicators such as GDP growth, unemployment and inflation inform these decisions by reflecting economic health. Market demand and supply for short-term funds also affect interbank lending rates. Additionally, global economic conditions and financial market stability can impact the overnight rate, prompting adjustments in response to external shocks or crises. Collectively, these factors guide central banks in setting the overnight rate to maintain economic stability.

Canada's overnight rate underwent significant fluctuations between during the current period, reflecting Canada's economic challenges and policy responses. In early 2020, as the COVID-19 pandemic hit, the Bank of Canada rapidly slashed rates to a record low of 0.25% to support the economy. This ultra-low rate environment persisted until the end of 2021 when inflationary pressures began to mount. The central bank then embarked on an aggressive tightening cycle, raising rates steadily to combat inflation. By July 2023, the overnight rate peaked at 5%, the highest level in over two decades. However, as inflation showed signs of cooling and economic growth slowed, the Bank of Canada pivoted to a more accommodative stance. Starting in June 2024, it began cutting rates, with two consecutive 50 basis point reductions in October and December, bringing the rate down to 3.25% by the end of 2024.

The overnight rate is projected to decline in 2025 due to slowing economic growth, easing inflation and the need to support domestic demand. Inflation is expected to remain within the Bank of Canada's target range, reducing the urgency for restrictive monetary policy. At the same time, economic growth is forecasted to remain below potential, with challenges such as elevated unemployment and subdued population growth weighing on demand. Additionally, concerns over rising mortgage costs and household debt burdens are prompting the central bank to adopt a more accommodative stance. These factors, combined with geopolitical uncertainties like potential US tariffs, are driving gradual rate cuts to stimulate consumption, investment, and overall economic activity while maintaining price stability.