Interest rates have played a critical role in shaping Canada’s economy for over a century. From periods of economic expansion to financial crises, interest rates have influenced borrowing, investing, homeownership, and business growth.

In this edition of The Financial Zown, we explore how Canada’s interest rate landscape has evolved over the past 100 years and what it means for today’s economy.

Early 20th Century: Stability & Transformation

At the start of the 20th century, Canada’s economy was largely agrarian, with banking systems still in development. Interest rates were relatively stable but fluctuated due to global events such as:

✔ World War I & II – Government policies were implemented to support war efforts, influencing borrowing and savings rates.

✔ The Great Depression (1929-1939) – A period of severe economic downturn led to policy interventions to stabilize the economy.

✔ The Creation of the Bank of Canada (1935) – Established to regulate monetary policy and manage interest rates more effectively.

💡 At its inception, the Bank of Canada’s benchmark interest rate was set at 2.5%.

Post-War Boom & The End of the Gold Standard

Following World War II, Canada experienced rapid economic expansion. The Bretton Woods Agreement (1944) established a system of fixed exchange rates, tying Canada’s monetary policy to the US dollar and influencing interest rates.

However, by the late 1960s, the world abandoned the gold standard, giving the Bank of Canada more control over setting domestic interest rates to manage inflation and economic growth.

The Inflation Crisis of the 1970s & 1980s

The 1970s were marked by skyrocketing inflation, fueled by oil price shocks and global economic uncertainty.

✔ The Bank of Canada responded by raising interest rates aggressively to curb inflation.

✔ By 1981, interest rates hit a record high of 21%—making borrowing nearly impossible for many businesses and consumers.

✔ High interest rates led to increased mortgage costs, slower economic growth, and shifts in consumer spending.

💡 This was one of the most expensive periods to take out a mortgage in Canadian history.

The 1990s: Inflation Targeting & Economic Stability

By the 1990s, the Bank of Canada had shifted to an inflation-targeting policy—keeping inflation within a controlled range.

✔ Interest rates declined to promote economic stability and business growth.

✔ Homeownership became more affordable due to lower mortgage rates.

✔ Businesses and consumers gained confidence in a more predictable economy.

💡 By the late 1990s, interest rates had stabilized at around 5-7%.

2008 Financial Crisis: The Era of Low Interest Rates

The 2008 global financial crisis led to one of the biggest shifts in monetary policy. To prevent economic collapse:

✔ The Bank of Canada slashed interest rates to near 0% to stimulate borrowing and investment.

✔ Quantitative easing (QE) was introduced, injecting money into the financial system to prevent deflation.

✔ This era of low mortgage rates made it easier for Canadians to buy homes—but also led to higher household debt levels.

💡 By 2009, the Bank of Canada’s key rate was just 0.25%—one of the lowest in history.

Recent Years: Inflation, Rate Hikes & A Changing Economy

After years of low interest rates, inflation surged post-pandemic, forcing the Bank of Canada to hike rates.

✔ Between 2022 and 2023, interest rates rose from 0.25% to over 5%, making borrowing far more expensive.

✔ Higher mortgage rates cooled the housing market, reducing home prices but increasing affordability challenges.

✔ As of early 2025, the Bank of Canada’s rate sits at 3.25%, as policymakers try to balance inflation control with economic stability.

💡 The Bank of Canada is now focused on preventing further inflation spikes while avoiding a recession.

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