Update: Bank of Canada raises interest rates

The Bank of Canada announced on September 8th that it was raising its key overnight interest rate 25 basis points, bringing the overnight rate to 1%. This is the third consecutive time the Bank of Canada has increased prime rate since June 2010.

Although many new reports have come out showing there has been a slowdown in the Canadian economy, the Bank of Canada still decided to push with a 25 basis point increase to prime rate, which now leaves prime rate sitting at 3%.

From the press release, the Bank of Canada noted that "the global economic recovery is proceeding but remains uneven, balancing strong activity in emerging market economies with weak growth in some advanced economies".

Canada was the first country from the Group of Seven to begin raising interest rates after the global recession.  The Bank of Canada outlined key steps in their previous Monetary Policy Report that there was some volatility in the global markets, and that Canada would be considered a leader among the pack of countries in recovering from the global recession.

Prime rates are one of the ways that the Bank of Canada use to control inflation within the country.  Since the early 1990s, the Bank of Canada has ensured that the inflation rate stays on a target of approximately 2%.  When inflation begins to increase, the Bank of Canada raises interest rates to help pull back.  When the inflation rate is very low, as it was during the global recession, interest rates are typically lower and more appealing to entice consumers to purchase products and services.

The next scheduled date for the Bank of Canada to review and make modifications to the key overnight rate is for October 19th.  The next Monetary Policy Report is scheduled to come out the following day, October 20th, and highlights some important facts about the market and where the country is headed financially.

Homeowners or potential mortgage borrowers have many options when choosing a mortgage.  One increasingly popular choice is a variable rate mortgage.  The variable rate mortgage has an interest rate which is calculated based on the current prime rate.  The more traditional method for choosing mortgage rates is going with a fixed rate, which holds a constant rate for the entire term of the mortgage.