Prime Rate History In Canada

To take a closer look at the last 15 years, here’s how the prime rate has changed since 2009:

The 1970s were an interesting time. Disco was hot, bell-bottoms were in and inflation started to soar. The consumer price index (CPI), which measures inflation, was just 1% at the beginning of 1971. By the end of the year, it was 4.9%. During that time, the BoC left rates unchanged and inflation was still rising.

“Though inflation continued to rise, the BoC didn’t raise its policy rate until April 1973 and the pace of rate increases was so slow that it took another three years for it to get its policy rate to restrictive levels,” TD senior economist James Orlando wrote in a 2022 report. “By that point it was too late.”

In 1973, adverse weather conditions caused food prices to jump a whopping 18.4%. Also, oil prices quadrupled as a result of the Yom Kippur war, resulting in higher gasoline prices. Inflation reached 12.7% in December 1974 and the economy entered into a recession.

The prime rate was 6% in 1972 before the BoC began raising rates. It peaked at 11% in 1974–or so most people thought.

There was another inflationary spike a few years later. Meat prices jumped 70% in 1978 and there was an oil crisis in 1979 due to the Iranian Revolution. The BoC raised rates again and the prime rate reached 15% by the end of 1979.

Meanwhile, Paul Volcker was appointed chair of the U.S. Federal Reserve in 1979 and he would begin to tackle inflation aggressively.

The problems of the 1970s spilled into the early 1980s. There was the Iran-Iraq war in 1980 and gasoline prices rose 45.5% in 1981. As a result, the Canadian CPI hit an all-time high of 12.9%.

Paul Volcker wanted to tame inflation and the Bank of Canada followed suit. The prime rate, which had fallen to 12.25% in July 1980 jumped to 22.75% by August 1981. A five-year fixed rate mortgage peaked at 21.5%. The good news: inflation was no longer out of control. The bad news: there were recessions in both 1980 and 1981.

Over time, the BoC cut rates and the prime rate was down to 8.25% in March 1987 before gradually rising back to 13.5% by the end of 1989.

Canada’s economy continued to remain strong and the BoC kept raising rates. The prime rate peaked at 14.75% in spring 1990. However, the economy began to falter soon after and rates began to decline, dropping to 6.25% by September 1992. After that, the rate was never back above 10% and never below 4.75% for the rest of the decade.

The 1990s were also when the BoC decided it would try out a new strategy called inflation targeting to keep inflation in check. The target range was between 1% and 3%, with the midpoint of the range (2%) being ideal. A few decades later, more people would become more familiar with this strategy.

By the turn of the century, the economy was still growing but at a slower pace and inflation remained under control. The prime rate hit a peak of 7.5% in 2000, but it soon came down following the 9/11 terrorist attacks. Canada’s economy contracted slightly, but managed to avoid a recession and the prime rate dropped to 3.75% by early 2002.

The economy began growing again and the BoC again started raising rates. The prime rate peaked at 6.25% in 2007, but a problem was on the horizon. The Global Financial Crisis hit and central banks around the world, including Canada’s own, began slashing rates. The prime rate dropped to as low as 2.25% in 2009.

Interest rates stayed low for a while. As the economy showed signs of life, the BoC began raising rates again, but the prime rate stayed at 3% from late 2010 to 2014. The economy started slowing and the BoC cut rates twice in 2015. However, the large banks didn’t match the two overnight rate cuts of 25 basis points each. Instead, they lowered their prime rates by 15 basis points both times to 2.7%.

Near the end of the 2010s, the economy improved and the BoC began raising rates again. The prime rate followed and reached 3.95% in 2018 and stayed there throughout 2019.

A new decade began and inflation continued to stay under control. But the COVID-19 pandemic soon swept across the world and the economy slowed as lockdowns across the country, and the world, took hold. The Bank of Canada made three rate cuts in March 2020 and the prime rate dropped to 2.45%.

The economy soon bounced back, but higher import prices, a decline in the Canadian dollar and rising energy prices due to geopolitical events led to rising prices, which pushed the inflation above 5% in early 2022. By June 2022, the annual inflation rate reached 8.1%, which was the largest increase in 41 years.

The BoC acted aggressively and the overnight rate rose by 400 basis points over 10 months, sending the prime rate up to 6.45% by the end of the year. By summer 2023, the prime rate was 7.2%–where it currently sits.

The BoC will be looking to bring inflation back to its target before cutting rates. Statistics Canada reported that the annual inflation rate fell to 2.8% in February 2024 from 2.9% in the previous month. While that was lower than what economists were expecting, it’s still slightly above the central bank’s inflation target.

In a March 2024 report, following the release of February’s inflation numbers, BMO chief economist Douglas Porter wrote, “April still seems too early to be pulling the trigger on rate cuts, though it can’t be entirely ruled out if the Business Outlook Survey shows even more progress. The softness of the domestic economy and increasing slack driven by higher rates is helping put downward pressure on inflation, just as the BoC intended. At a minimum for April, look for the Bank to open the door to rate cuts. BMO continues to call for a June start to rate cuts, and this report certainly reinforces our conviction.”

CIBC, RBC, and TD are also expecting rates to fall in the second quarter while Scotiabank doesn’t expect the BoC to act until the third quarter.

Over the long term, TD is the most optimistic. It expects the Bank of Canada to lower the overnight rate by 150 basis points to 3.5% (implying a prime rate of 5.7%) by the end of the year and another 125 basis points to 2.25% (implying a prime rate of 4.45%) in 2025. However, RBC is a little more cautious. It expects the overnight rate to fall by 100 basis points to 4% by the end of this year and another decline of 100 basis points to 3% in the following year.

Related: Mortgage Rates History