Bank of Canada holds target interest rate at 2.25% in January 2026 announcement

The Bank of Canada has kicked off the new year with a second consecutive hold, opting to keep its benchmark borrowing rate at 2.25% where it has remained since October. This rate is used by lenders to set their prime rates and, by extension, floating-rate borrowing products such as variable mortgages, HELOCs, as well as certain types of loans and passive investments like GICs.

As a result of today’s rate hold, the prime rate will remain unchanged at 4.45%, and the current lowest five-year variable mortgage rates clocks in at 3.35%.

This rate hold ushers the central bank into what’s expected to be a prolonged period of stability; in its last two rate announcements, the Bank’s Governing Council stated that the current policy rate is “about right” to support economic conditions. Despite a stronger showing to finish 2025, Canada’s economy is expected to soften this year, and significant headwinds – such as continued tariff pressure and the upcoming renegotiation of CUSMA – hang heavy over policymakers’ heads. 

“US trade restrictions and uncertainty continue to disrupt growth in Canada. After a strong third quarter, GDP growth in the fourth quarter likely stalled,” writes the Bank in the press release accompanying the rate announcement. “Exports continue to be buffeted by US tariffs, while domestic demand appears to be picking up. Employment has risen in recent months. Still, the unemployment rate remains elevated at 6.8% and relatively few businesses say they plan to hire more workers.”  

“However, uncertainty is heightened and we are monitoring risks closely,” the Bank’s Governing Council members write. “If the outlook changes, we are prepared to respond. The Bank is committed to ensuring that Canadians continue to have confidence in price stability through this period of global upheaval.”

Tentative economic recovery expected in 2026

Overall, the Bank expects consumer spending and business investment to strengthen gradually throughout the year, pending fiscal support from the government. The economy is expected to grow 1.1% in 2026 and another 1.5% in 2027, which remains largely with their October call.

Of course, a “key source of uncertainty is the upcoming review of the Canada-US-Mexico Agreement” – the failure to negotiate this key agreement with the US would plunge a wider swatch of Canadian industries into tariffs and cause renewed economic turbulence.

Inflation – another key indicator tracked by the Bank – has also shown signs of stabilization, further removing the need for rate movement. The most recent December Consumer Price Index report from Statistics Canada shows the pace of inflation growth rose to 2.4% from 2.2% in November, but that its core measures – which are the Bank’s preferred gauges – fell. Should this trend continue throughout the year – and combined with further deterioration in US-Canada trade relations – the Bank could be in a position to lower its policy rate further by year end – a turnaround from previous forecasts that the Bank would be likely to hike by 2027. According to the Bank, it expects inflation to remain close to its 2% target over its protection period, with the measure coming in at 2.1% overall in 2025.

A lengthy rate hold will also be further supported by similar policy from the US Federal Reserve – the BoC’s US counterpart – which has also strongly telegraphed that it will hold American interest rates steady, despite growing political pressure to artificially lower them.

Overall, the central bank is battening down the hatches and banking cutting room as insurance, given both geopolitical and  macroeconomic factors remain highly unpredictable – which will have consequences for interest rates.

What does today’s rate hold mean for variable mortgage borrowers?

If you currently have a variable-rate mortgage, nothing will change as a result of today’s rate hold; your interest rate, payment size, or the amount of your payment that services interest, will all remain the same.

For those currently shopping for a variable mortgage rate, the pricing available today is the lowest since the summer of 2022; the Bank has lowered its rate a cumulative nine times between June 2024 and October 2025, bringing it down a total of 275 basis points, from its previous high of 5%.

That’s improved conditions significantly for borrowers – and given the Bank is expected to hold rates for the foreseeable future, scoring a low variable rate can be a great way to save money. Of course, this is as long as your budget can absorb any surprise increases – which are never off the table – and it’s also a great idea to have a plan to convert into a fixed rate if needed, a feature offered by many mortgage lenders.

However, time is still of the essence for anyone mulling over a variable option – as it’s possible that their spread to prime could change. This is the difference between the prime rate and the actual rate that lenders offer – they sometimes increase this spread to protect their margins in a lower-rate environment, which further whittles savings for borrowers.

Economic unease to keep fixed rates high

Fixed mortgage rates are also unlikely to move lower in the near future, as market fears keep bond yields firmly elevated.

Mr. Trump’s recent threats to take Greenland by hostile or economic force, combined with increasingly erratic trade policy and growing civil unrest south of the border, have resulted in very nervous markets. Investors have been piling into gold – considered the safest of havens – rather than US Treasuries. 

That’s resulted in elevated global bond yields, which is having  a knock-on effect on Canadian yields – the Government of Canada five-year yield, which lenders generally use as a benchmark when setting their fixed mortgage rates – has remained firmly in the 2.8% range since December. There is little movement expected for five-year fixed mortgage rates, with insured options currently priced as low as 3.84%. However, this is still a comparably lower rate than what has been offered in recent years – down from close to 5% in 2023 and the tail-end of 2024. For borrowers craving peace of mind amid these volatile economic climes, it can be a great idea to lock in now.

What does this mean for Canada’s housing market?

A prolonged rate hold will do little to incentivize home buyers who have remained on the sidelines throughout 2025 – though the fact that borrowing costs are at comparable lower levels will offer some affordability relief to those who are planning to buy this year. 

The reality is that Canada’s buying slump is mainly attributed to a lack of confidence and fear amid highly volatile economic conditions. Concern over job loss remains a top factor, especially in markets that are exposed to Trump’s steel and manufacturing tariffs. This has contributed to multi-decade lows for sales in Canada’s largest markets, which likely won’t see any substantial improvement as long as such threats remain.

Also read:

• What is Canada’s prime rate?
• Canada’s Overnight Lending Rate
• Inflation and the Consumer Price Index in Canada
• Bank of Canada holds rate at 2.25% in December 2025 announcement
• Canadian housing market ends year on chilly note, sales expected to rise 5% this year