Bank of Canada to hold key interest rate at 2.25% amid oil price boom

The Bank of Canada (BoC) announced today that the overnight interest rate would be held at 2.25% despite rising costs of fuel. 

This interest rate is also referred to as the policy interest rate, key interest rate or target rate, and essentially acts as the benchmark cost of borrowing money in Canada. 

When the BoC either increases or decreases the rate, it influences the interest rate that lenders use for variable loans, lines of credit and mortgages. 

Often, the central bank will increase the interest rate when inflation is high to dissuade borrowing and decrease the rate when inflation is down. The BoC’s target for inflation in Canada is always 2%.

It is an important rate for potential homebuyers to keep an eye on because they may get a cheaper loan if this rate is lower. 

Since April 2024, this rate has been slowly cut by the BoC, from 4.75% to the 2.25% it is today. 

According to the BoC, the evolving war in Iran and the blockade of the Strait of Hormuz is causing heightened volatile financial conditions and shifts in global trade patterns, which has helped inform their decision to hold the rate. 

“The Iran war has led to sharply higher energy prices and transportation disruptions, diminishing growth prospects in oil-importing countries and boosting inflation worldwide,” wrote the BoC in a media release. 

However, the central bank says that because Canada is a large exporter of oil, higher oil prices increase national income despite consumers being squeezed by higher gasoline prices.

This uptick in oil prices has been a driving force behind the Consumer Price Index (CPI) inflation rate climbing to 2.4% in March, following months of slowed inflation. 

The BoC says that although the rate is above their target of 2%, it is mostly because of gas and oil prices, but other factors contributing to the CPI are currently down. 

This reasoning is why the overnight interest rate was held at 2.25%. 

“We are closely monitoring the impact of the conflict in the Middle East and how the economy is responding to US tariffs and trade policy uncertainty,” said the BoC. 

“[The BoC’s] Governing Council is looking through the war’s immediate impact on inflation but will not let higher energy prices become persistent inflation. As the outlook evolves, we stand ready to respond as needed.”

According to mortgage expert Penelope Graham from Ratehub.ca, this decision brings with it stability for potential homebuyers. 

“While this fourth consecutive rate hold brings little relief for variable-rate borrowers, it does indicate that borrowing costs are stable,” said Graham. 

She added that today’s lowest five-year variable rates remain solid, at around 3.35%, but if inflation continues to rise, borrowers may face a rate increase before the end of the year. 

Meanwhile, five-year fixed rate mortgages currently remain in the 3.1% range. 

As for real estate, Graham says that as long as financial pressures grow, such as the cost of gas, people will be less inclined to risk buying a new home. 

“People have already been grappling with economic volatility—first from erratic US tariff policy, and now a sharply rising cost of living, and have been less likely to commit to an enormous financial purchase such as buying a home,” she said. 

Despite people being less likely to buy a home due to inflation, the looming threat of an increase to the BoC’s overnight interest rate may have the opposite effect on some, driving them to buy before a potential increase.