Bank of Canada cuts target interest rate to 2.5% in September 2025 announcement
Six months of rate stagnancy came to an end today, as the Bank of Canada lowered its trend-setting Overnight Lending Rate by a quarter of a percentage point, bringing it from 2.75%, to 2.5% – its lowest level since July 2022. Prior to today, the BoC has held its rate steady for three consecutive announcements, after lowering it to 2.75% in March.
As a result, the Prime rate used by Canadian lenders will dip to 4.7%, which will in turn lead to lower pricing for variable-rate borrowing products.
A baked-in cut
Today’s rate cut was widely anticipated by markets after a slew of data showed the economy is starting to weaken; the August labour report revealed employment in Canada has declined to a nine-year low, with a loss of 66,000 jobs and the unemployment rate rising to 7.1%.
The latest GDP report also indicated a stark decline, as the economy slowed by 1.6% in the second quarter of the year due to the impact of tariffs.
As well, a softer-than-expected August inflation report further supported today’s cut, as the headline number remains under 2%, and the core measures of inflation – which are closely monitored by the Bank – are stable.
The Bank touched on all points in its announcement, saying that while the Canadian and global economies were initially resilient to tariffs, that strength is eroding, evident in sharp drops in business investment and exports. It also provided optimistic commentary on inflation’s progress, saying the "upward momentum seen earlier this year has dissipated.” The federal government’s recent decision to remove most retaliatory tariffs on imported goods from the US will also help ease inflation in the coming months.
“With a weaker economy and less upside risk to inflation, Governing Council judged that a reduction in the policy rate was appropriate to better balance the risks,” states the central bank’s press release. “Looking ahead, the disruptive effects of shifts in trade will continue to add costs even as they weigh on economic activity.”
Looking forward, the Bank will be paying “particular attention” to how Canada’s exports evolve in the face of tariffs and the shifting trade scenario, and the impact that has on jobs, business investment, household spending, as well as consumer prices.
This language also leaves the door open for further rate cuts should the data show more weakness, either in the Bank’s next announcement on October 29th, or the following one on December 10.
The US Fed is also poised to cut rates
The path to further BoC rate cuts may also be cleared by mounting pressure south of the border; the US Federal Reserve is also widely anticipated to cut its benchmark Federal Funds Rate by a quarter percentage, in its announcement this afternoon.
This is partly due to the fact that American job numbers have also dropped significantly, which is a key part of the Fed’s dual rate mandate. The American central bank is also facing political pressure, as US President Donald Trump has made demands that it lower rates, even as the nation’s inflation rate continues to run hot.
Historically, the BoC doesn’t deviate too far from the Fed’s rate path, as doing so could heat inflation and weaken the Canadian currency. With the Fed poised for its own cutting path, the Bank can do the same without those added risks.
What does today’s cut mean for mortgage borrowers?
Variable mortgage borrowers will see their rate drop
Those most directly impacted by today’s rate cut are those holding variable-rate mortgages because their interest rate is pinned to movement in the Bank of Canada’s overnight lending rate. Depending on the type of variable mortgage they have, borrowers will see either their monthly payment lower, or a larger portion of their payment servicing their principal loan amount.
Today’s cut could also lower Canada’s lowest five-year variable mortgage rate from 3.95% to 3.7%. That will translate into monthly savings of $84 per month, and $1,008 per year on mortgage payments.
According to Ratehub.ca's mortgage payment calculator, a homeowner who put a 10% down payment on a $672,784* home with a 5-year variable rate of 3.95% amortized over 25 years (total mortgage amount of: $624,277) has a monthly mortgage payment of $3,267.
With today’s 25-basis point rate decrease, their variable mortgage rate will decrease to 3.70% and their monthly payment will decrease to $3,183.
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Fixed mortgage rates could be discounted further
While fixed mortgage rates are not directly controlled by the Bank of Canada’s rate, they are influenced by bond market pricing, which is sharply reactive to central bank policy. Growing expectations that both the Fed and BoC are entering a cutting cycle have led to lower bond yields in recent weeks; the 10-year US Treasury bond, which acts as a global benchmark, is currently in the 4.0% range, having dropped roughly 50 basis points since July.
That’s had a pulldown effect on the Government of Canada five-year bond yield, which lenders use to price their five-year fixed mortgage rates, bringing yields down to the 2.6 - low 2.7% range. Some lenders have responded by lowering their fixed mortgage rates, meaning rate shoppers and renewing borrowers have attractive reasons to lock in, with the best five-year fixed option currently at 3.94%.
Should either central bank take a dovish stance in their rate announcement or accompanying speeches, yields – and fixed rates – could soften further.
What mortgage rate type should borrowers choose?
With variable mortgage rates lowering, they are once again priced below the best fixed-rate options. As sentiment builds that more cuts are coming, going with a variable rate may seem an attractive strategy for borrowers looking to score the lowest rate possible.
Choosing a variable rate may very well offer great savings in the months to come – but this choice should always depend on a borrowers’ risk tolerance. There are still plenty of headwinds – namely, unpredictable trade policy – that could stoke inflation, and cause the BoC to reverse course on rate cuts. Borrowers should ensure they have a budget that can absorb any increases to their mortgage payments, and have a plan for either riding out a rate-hiking cycle, or locking into a fixed-rate option if needed.
Will today’s rate cut spur real estate sales?
While this spring heralded a historically slow real estate market, there have been growing signs of recovery throughout the summer months; sales hit their highest August since 2021, according to the Canadian Real Estate Association (CREA).
This most recent rate cut is likely to draw more prospective buyers out of the woodwork; many have stayed benched due to a combination of economic uncertainty, and steep borrowing costs. Now that both have eased slightly – and the fact that plenty of inventory has kept home prices from reheating – buyers may feel now is the time to take advantage of today’s attractive affordability conditions.
What does this mean for banking products and investments?
While today’s rate cut spells good news for mortgage borrowers, it’s less cheery for certain bank account holders and investors; the BoC and Prime rates also impact types of loans such as lines of credit, HELOCs, personal loans, and car loans.
This means the rate of return for savings and investing products including high-interest savings accounts and guaranteed investment certificates (GICs) will decrease as a result of today’s rate cut. However, these remain stable “safe haven” investments, and rates are still historically competitive, making them a decent option for anyone looking to avoid market volatility.
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Penelope Graham, Head of Content
Penelope has over a decade of experience covering real estate, mortgage, and personal finance topics and her commentary on the housing market is featured on both national and local media outlets.