Overnight Rate

The overnight rate is the rate at which large financial institutions lend each other funds for one day, typically to settle their end-of-day balances. In Canada, the Bank of Canada sets a target for the overnight rate and keeps the actual market rate inside a narrow operating band around that target. The realized rate is tracked by CORRA, an interest rate benchmark used in other financial contracts.

How the target is set and enforced

The Bank of Canada announces its target on fixed dates, typically eight times a year. The target is the main lever of Canadian monetary policy: raising it makes short-term borrowing more expensive, while lowering it does the opposite.

Large institutions settle payments through Canada's high-value payment system, and any end-of-day shortfall must be covered. The Bank of Canada lends at the top of its operating band — the Bank Rate — and pays interest on deposits at the bottom. Since an institution can always borrow at the top and deposit at the bottom, the market overnight rate normally trades inside that band, and the Bank Rate is watched as the upper bound.

How it reaches a mortgage

Changes to the target reach borrowers mainly through prime rate, the benchmark Canadian banks use for variable-rate products. When the target moves, prime typically follows within a short period, which changes the interest charged on a variable-rate mortgage, a HELOC, or a line of credit. Fixed-rate mortgages behave differently, because they are priced off Government of Canada bond yields and lender funding costs rather than the target itself. A fixed payment generally stays the same until the mortgage renews.

Why it matters, and what it does not tell you

For a borrower, the target matters because it shapes the cost of variable debt and, indirectly, how much they can qualify for: the federal stress test requires qualification at a rate above the contract rate, so a higher overnight environment can shrink borrowing room. The overnight rate is a policy signal, however, not a forecast. Bond markets, competition between lenders, and each borrower's own profile decide the rate actually offered. For how the target transmits through the economy, see policy interest rate and the guide The Bank of Canada Policy Rate and Your Mortgage.