Bank of Canada holds target interest rate at 2.75% in June 2025 announcement

Canadian interest rates will remain in a holding pattern, as the nation’s central bank announced no change this morning to its benchmark cost of borrowing. The Bank of Canada (BoC) opted to keep its overnight lending rate – which lenders use to set their prime interest rates and, by extension, their variable borrowing rates – at 2.75%, where it has remained since April 16th. As a result, Canada’s prime rate will remain at 4.95%.

This is the second rate hold in a row from the BoC, following the seven consecutive rate cuts it delivered between June 2024 and March of this year. Altogether, the overnight lending rate has decreased by 225 basis points, from its previous high of 5%.

Overall, today’s rate hold won’t be a surprise to markets; economists had largely anticipated the BoC would stick to status quo, with the market pricing in the odds at 75%. However, the central bank’s decision was a complicated one, following a mixed bag of economic data and fallout from the ongoing US tariff narrative. 

The Bank finds itself toeing a delicate balance between buffering Canada’s economy from the growing risk of recession, while maintaining inflation growth within its sustainable 2% target. The latter has proved particularly challenging, as prices have started to increase in response to tariffs. 

“With uncertainty about US tariffs still high, the Canadian economy softer but not sharply weaker, and some unexpected firmness in recent inflation data, Governing Council decided to hold the policy rate as we gain more information on US trade policy and its impacts,” states the press release accompanying the Bank’s rate announcement.

“We will continue to assess the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs.”

Rising inflation prompts rate hold

While the most recent April Consumer Price Index revealed a promising headline number at 1.7%, that was largely due to a year-over-year plunge in gas prices, masking creeping increases for other items, including groceries. In fact, core inflation – the key metric monitored by the BoC – rose above 3%, largely sealing the deal for today’s rate hold.

In the press release accompanying the rate announcement, the Bank states that excluding taxes, inflation actually rose by 2.3%, higher than their forecast, and pointed to the heating core measures, along consumer expectations that prices will increase.

“Recent surveys indicate that households continue to expect that tariffs will raise prices and many businesses say they intend to pass on the costs of higher tariffs. The Bank will be watching all these indicators closely to gauge how inflationary pressures are evolving,” it states.

Future rate cuts likely as economy cools

At the same time, cracks have started to form in the Canadian economy; the latest jobs report revealed Canada’s unemployment rate rose to 6.9% in April – a high not seen outside of the pandemic since January 2017 – with job losses concentrated in the manufacturing sector, one of the hardest-hit from tariffs. And while the latest Gross Domestic Product report showed surprising strength, rising 2.2% in the first quarter of the year, much of that was due to a pull-ahead effect on exports, as businesses look to get ahead of tariffs. 

It’s expected this surge will be a temporary one, with the economy cooling rapidly in the coming months; consumers are already taking caution, as household spending dropped to just 0.3 in Q1, after an increase of 1.2% the previous quarter.

In fact, a new report out from the Organisation for Economic Co-operation and Development has sounded the alarm, saying ongoing trade challenges, along with weakening consumer and business confidence, will cause global economic growth to fall to just 2.9% in 2025 and 2026, from the previous 3.3% in 2024. Pain will be particularly acute in Canada, with the OECD forecasting growth of just 1% this year and 1.1% next, from 1.5% last year.

As a result, the organisation expects the BoC will deliver another 50 basis points in rate cuts by the end of the year, bringing the overnight lending rate to 2.25%. “The central bank will need to carefully balance the opposing impacts on inflation from tariffs: upward pressure from higher import prices and downward pressure from lower demand,” states the report. 

The BoC again chose not to disclose a formal forecast for GDP in this announcement, acknowledging the strong Q2 report and the factors behind it, as well as the drop in real estate demand, and softening labour market, stating, “The economy is expected to be considerably weaker in the second quarter, with the strength in exports and inventories reversing and final domestic demand remaining subdued.”  

Of course, a recession on Canadian soil is only part of the BoC’s concern; should the US economy tank as a result of tariffs, the resulting economic black hole will take Canada down with it, given the US continues to be our nation’s largest trading partner. The same OECD report gave the US the most dire downgrade, with GDP to decline from 2.8% in 2024 to 1.6% this year and 1.5% in 2026.

The BoC must also heed the direction set by the US Federal Reserve, as deviating too far from US monetary policy puts upward pressure on the loonie, and by extension, Canadian inflation. Given US economic growth is still stable, and as import tariffs are set to push American inflation higher, it’s unlikely the US central bank will be in a position to cut rates until at least 2026. 

“Governing Council is proceeding carefully, with particular attention to the risks and uncertainties facing the Canadian economy,” it states. “These include: the extent to which higher US tariffs reduce demand for Canadian exports; how much this spills over into business investment, employment and household spending; how much and how quickly cost increases are passed on to consumer prices; and how inflation expectations evolve.”

What this means for variable mortgage rates

As there was no change to the BoC’s trend-setting rate, the prime rate – currently 4.95% – used by Canada’s consumer lenders will remain the same. That means variable mortgage rates, which are priced based on the prime rate plus or minus a percentage, won’t see any change to their interest rate, their monthly payment size, or the amount of their payment servicing interest or their principal debt amount. The lowest five-year variable mortgage rate in Canada will remain at 3.95% for the foreseeable future, until the BoC makes its next announcement.

What this means for fixed mortgage rates

Fixed mortgage rates are not directly affected by the BoC’s rate announcements, but they are certainly under its influence. This is because lenders base their fixed mortgage rate pricing on bond pricing and yields. When bond yields fall – especially those that are backed by governments – it signals higher investors feel confident in the credit-worthiness of that bond issuer. This allows for a lower risk premium on the bond, meaning it can pay out less in yields and still entice investors due to its perceived security and safety.

The opposite happens when investors lose confidence in the bond issuer’s ability to pay out yields – a higher risk premium is then required, pushing up the bond’s yield, but also lowering its overall value.

When the risk premium and yields sharply rise for government-backed bonds, it’s a wider economic signal that investors are losing faith in that nation’s economy. This occurred in mid April in the US 10-year Treasury yield; after US President Trump unveiled his aggressive plan for reciprocal tariffs, stock markets seized, and bond investors fled US-backed debt. Given the 10-year Treasury acts as the global benchmark for debt pricing, Canada’s bond yields followed suit.

Yields have remained elevated in both countries in the weeks since, as investors expect that tariff volatility will continue, and inflation will rise. The market has also already priced in the anticipated further cuts from the BoC, and also expect inflation will increase as a result of federal fiscal stimulus, which will require more government bond issuance.. As of publish time, the US 10-year Treasury yield remains in the upper 4.4% range, while the Government of Canada five-year bond yield is in the 2.8% range. 

This has put a floor under fixed mortgage rate pricing – while rates are still comparatively low, with the best five-year fixed insured option in Canada at 3.84%, banks have zero room to discount. Any further volatility in markets that push yields up will also pile upward pressure on fixed-rate mortgage options.

Today’s rate hold will prolong housing market deep freeze

Ongoing tariff uncertainty has had a chilling effect on the typically hot Canadian spring real estate market, and today’s rate hold will do little to re-incentivize buyers. The most recent national data from the Canadian Real Estate Association showed home sales plunged 9.8% year over year in April; the most recent May stats for the Greater Toronto Area out this morning revealed a 13% decrease in sales activity for the region, and the slowest May since 2002, not counting the effects of the pandemic in May 2020.

This is largely due to fears of potential job loss or overall financial hardship should a recession occur; few buyers are keen to commit to a large financial undertaking in today’s macroeconomic environment. The supply of available homes for sale has also steadily grown, leading to buyer conditions in many markets.

That’s all started to chip away at home prices – the national average was down 3.9% year over year to $679,866, and down by 4% in the GTA to $1.1 million.

Until recession fears subside, it’s unlikely buyers will return to the market en-masse, even as comparatively lower mortgage rates and softening home prices improve affordability.

The impact on banking products and investments

A BoC rate hold goes beyond the mortgage market. Following today’s rate hold the rate of return will be unchanged products such as personal loans, car loans, and lines of credit, which are also variable-rate products and based on the BoC’s rate.

That’s decent news for savers with prime-based banking products such as high-interest savings accounts and guaranteed investment certificates (GICs) as their rate of return will stay stable.

GICs are still available at a competitive rate, and remain a solid “safe-haven” investment amid ongoing tariff uncertainty and market upheaval.

Also read:

• Bank of Canada holds target interest rate at 2.75% in April 2025 announcement
• April Canadian home sale flat as buyers stick to the sidelines
• Lower home prices in April improved affordability in over half of Canada’s markets