Bank of Canada holds key interest rate at 2.25% as Middle East conflict continues

The Bank of Canada (BoC) has opted to once again hold the overnight interest rate at 2.25% in an effort to balance precarious economic pressures. 

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. 

In their latest interest rate announcement, the BoC has cited the conflict in the Middle East as a key factor in their decision. 

The conflict is now in its fourth month, and impacts have resulted in increases in energy prices and disruptions in global supply chains. 

While the conflict continues, the United States administration has also continued to propose new tariffs, causing trade policy to become increasingly uncertain.

“The narrative from the Bank was little changed from its April announcement; conflict in the Middle East and resulting inflation pressures continue to be the biggest headwinds for monetary policy, along with ongoing trade uncertainty with the United States,” said Penelope Graham, mortgage expert at Ratehub.ca.  

“The Bank maintains that it will continue to look through the shocks of the war and elevated oil prices, but emphasized it will not let those factors permanently impact inflation.”

Inflation rose in April, reaching 2.8%, which reflects increasing energy prices. The BoC says that inflation on food has moderated but remains high, and shelter inflation continued to slow. 

Ultimately, the central bank expects total inflation to hover around 3% in the near term before easing gradually towards 2%.

Impacts on mortgages and real estate

According to Graham, the BoC held its rate again to extended stability for anyone who already has a variable-rate mortgage. 

Holding the rate means that borrowers won’t see any change in their interest rate, monthly payment or their interest payments.

“For anyone shopping for a variable rate, it’s a mixed message,” said Graham. 

“While a hold means rates won’t be going down—and likely won’t for the remainder of the year, based on the Bank’s latest commentary—current variable rate pricing remains the lowest in Canada with the lowest available five-year variable term at 3.35%.”

She noted that this marks a difference of 69 basis points when compared to the lowest five-year fixed rate. On a $500,000 mortgage, that works out to $182 less paid monthly.

“As the Bank is expected to stick to its rate hold stance, there is a growing narrative that interest rates—and the housing market—have reached their bottom in terms of affordability,” she continued.  

“While many buyers remain trepidatious amid economic uncertainty, motivated buyers may recognize an opportunity to enter the market while rates remain competitive.”

According to a recent report from the Victoria Real Estate Board (VREB) sales are up in the capital region and there is more inventory available for those seeking to buy a home. 

At the end of May, there were 4,029 active listings on the VREB Multiple Listing Service, an increase of 8.6% since April and 8.4% since the same time last year. 

— with files from Mike Kelly