Bank of Canada increases key interest rate for first time since July 2023

The Bank of Canada (BoC) has increased the overnight interest rate by 25 basis points to 2.5% amid the ongoing trade war with the United States and the conflict 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. 

This increase marks the first time the rate has risen by the BoC since July 2023. 

Since April 2024, this rate has been slowly cut by the BoC, from 4.75% to 2.25% before this latest increase. 

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. 

If inflation continues to increase to a CPI of 3.5%, the BoC will consider further increases. 

The BoC says the trade war with the US and their war with Iran have contributed significantly to the increase in inflation, especially when it comes to prices for fuel. 

According to Clay Jarvis, mortgage expert for Ratehub.ca, the increase of the key interest rate was bound to come sooner or later due to mounting economic pressures. 

“Today’s rate hike speaks to the tightrope the BoC has been walking this year,” said Jarvis. 

“It’s both a pre-emptive strike against widespread inflation and an acknowledgement that Canada’s economic prospects are brighter than the average Canadian might realize.”

Jarvis pointed out that prices aren’t going up because of an overheated economy, but rather  because of rising energy costs.

However, the overnight rate has no impact on gas prices. With the rate going up, consumers and businesses will end up paying more to access credit at a time when other costs are elevated.

On mortgages and housing

Unfortunately for those seeking to borrow or on variable loans, the higher overnight rate will have an impact on lenders’ prime rates in the days to come. 

Lenders such as banks will be increasing their rates by 25 points, or 0.25%, in line with the BoC’s increase. 

Fixed mortgage rates, on the other hand, are not directly affected by BoC rate decisions. 

When it comes to choosing between a fixed or variable mortgage rate, homebuyers will have to take several factors into account. 

“Variables are lower and provide flexibility, but future rate increases need to be budgeted for,” explained Jarvis. 

“Fixed rates are elevated, but once you qualify your mortgage costs are set. That kind of stability can be worth paying a premium for.”

He added that both types of rates could rise further this year, so homebuyers and renewing homeowners should consider getting a pre-approval underway.

Jarvis also predicted the rate increase is going to slow the real estate market further than it is currently. 

“Buyers are facing rising borrowing costs, higher gas prices, and uncertainty around the economy,” he said. 

It’s arguable that rates aren’t even their biggest concern right now. Stability in non-mortgage costs and predictability around the future of the economy may do more to increase buyer confidence.”

The next scheduled BoC announcement regarding the overnight interest rate target is December 9th, 2026.