Bank of Canada holds key interest rate at 2.25% as tensions in Middle East persist

Once again, the Bank of Canada (BoC) has held the overnight interest rate at 2.25% in an effort to further ease inflation amid conflict in the Middle East. 

This interest rate is also known as the policy interest rate, key interest rate or target rate, and 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. 

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%.

Most notably, 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. 

In the BoC’s latest announcement on the overnight interest rate, the central bank noted that growth has been picking up and inflation is projected to ease gradually from its recent spike. 

However, a key reason for the rate hold revolves around the risks and uncertainties related to the war in the Middle East and US trade policy.

Higher oil prices stemming from the Middle East conflict continue to impact global economies, including in Canada. 

In BC, oil prices are lower than their peak in April, but the trade situation in the Middle East remains volatile and a decrease in inflation is highly dependent on how the conflict unfolds, says the BoC.

The Consumer Price Index (CPI) inflation rate rose further to 3.2% in May, largely due to higher gasoline prices, but excluding gas prices, inflation was at 2.2% and measures of core inflation remained close to 2%. 

The central bank noted that CPI inflation is expected to remain elevated in June before gradually easing in the coming months. The BoC expects CPI inflation to return to around 2% by early 2027, depending on whether gas prices can come down. 

According to Senior Director of Mortgages at Ratehub.ca Jamie David, the BoC’s announcement to hold the rate was not a surprising one.

“The Bank’s message today is one of cautious optimism,” said David. 

“There are encouraging signs that the economy is regaining momentum, with growth picking up after a sluggish start to the year and inflation expected to gradually moderate from its recent highs. However, policymakers continue to face considerable uncertainty stemming from the ongoing conflict in Iran and increasingly fractious US trade policy.”

What this means for prospective homeowners

David noted that the BoC rate hold will bring more stability to those with variable-rate mortgages because they will not see any change to their monthly payments. 

However, that is not the case for those with fixed mortgages.

“Borrowers interested in a fixed-rate mortgage are facing a different reality,” said David. 

“While the lowest available five-year fixed rate is currently holding at 3.94%, that rate may not be available for much longer as most lenders have already moved back above the 4% mark.”

She added that those considering a home purchase this year, or those with an upcoming renewal, may want to act sooner rather than later if they hope for a lower rate on a fixed-rate mortgage. 

This most recent BoC rate announcement will be the last until September 2nd.