The Bank of Canada announces an increase in its target for the overnight rate. What is the most likely immediate impact on the Canadian financial system?

Question: The Bank of Canada announces an increase in its target for the overnight rate. What is the most likely immediate impact on the Canadian financial system?

Answer options:

• Commercial banks will decrease their prime lending rate. ✅ Borrowing costs for consumers and businesses will generally increase.
• The yield on short-term government bonds will likely decrease.
• The Canadian dollar will typically depreciate against major currencies.

Correct answer: Borrowing costs for consumers and businesses will generally increase.

Explanation: An increase in the Bank of Canada's target for the overnight rate signals a tighter monetary policy. This typically leads to commercial banks raising their prime lending rates, which in turn increases borrowing costs for consumers and businesses throughout the economy.