Bank of Canada holds key interest rate at 2.25% amid trade war with US

This week, the Bank of Canada (BoC) announced that the key interest rate would be held at 2.25% as the trade war continues to escalate with the United States and conflict persists in the Middle East. 

The key interest rate, also referred to as the overnight rate, acts as the benchmark cost of borrowing money in Canada. 

When the BoC chooses to either increase or decrease the rate, it influences the interest rate that lenders use for variable loans, lines of credit and mortgages. 

It is an important rate for potential homebuyers 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. 

Often, the rate is increased when inflation is high to dissuade borrowing and decreased when inflation is down to encourage it. The BoC’s target for inflation in Canada is set at 2%.

Currently the Consumer Price Index (CPI), which indicates the rate of inflation in Canada, is at 3%, up from 2.8% in June. 

According to the BOC, the continuing conflict in the Middle East is causing energy prices to remain high. 

Additionally, new US tariffs and the Canadian counter-measures that were announced after a trade deal fell through between the two countries have informed the BoC decision to hold the rate. 

Both of these situations remain fluid, and could impact the Canadian economy further. 

The BoC says that inflation has been around 3% because of persistently higher gasoline prices. However, when excluding gas prices from the CPI, the inflation rate is closer to 2.2%.  

Because there is little progress in reopening the Strait of Hormuz, risks to the BoC’s inflation forecast have increased. 

“The longer that high oil prices and elevated refinery margins persist, the greater the risk of spillover to the prices of other goods and services,” said the BoC in a media release. 

“New US tariffs and Canadian counter-tariffs will also raise costs for some businesses and could feed into consumer prices over time.”

According to mortgage experts at Ratehub.ca, the BoC decision to hold the key interest rate was expected. 

“With the latest inflation data showing headline CPI at 3.0% and energy prices once again rising amid renewed conflict between the US and Iran, the Bank has little room to move aggressively in either direction,” said Jaime David, vice president of mortgages at Ratehub.ca. 

“Future rate cuts remain on the table. The Bank has acknowledged that tariffs and higher energy and gasoline prices pose risks to inflation.”

David also noted that if the trade war begins to weaken consumer spending, business investment and employment in Canada, the BoC may have to cut the interest rate to support growth amid economic pressure.

For those with fixed mortgage rates, David says that rates could fluctuate in either direction in the coming weeks depending on the tariff situation or the conflict in Iran. 

“Borrowers should expect continued volatility in fixed rates,” she said. 

For those with variable mortgage rates, David says they should remain unchanged for the time being, but should keep an eye on developments in the trade war. 

“If tariffs begin to weigh heavily on economic growth, employment, and consumer demand, the Bank could have more room to cut rates to support the economy,” said David.

David noted that Canada’s housing market had previously been showing signs of stabilization, but the trade war could put that recovery on hold. 

Buyers and sellers both are adopting a “wait-and-see” approach amid heightened economic uncertainty around employment, household incomes and mortgage rates.