Overview
The Bank of Canada’s interest rate decisions are among the most closely watched economic events in the country, particularly for the millions of Canadians who hold mortgages or are considering purchasing a home. The Bank’s overnight policy rate directly influences the prime lending rate charged by Canadian banks, which in turn affects variable mortgage rates and home equity lines of credit. Understanding how rate decisions affect the housing market is essential context for any Canadian homebuyer or homeowner.
How the Bank of Canada Sets Rates
The Bank of Canada’s Governing Council meets eight times per year to review economic conditions and set the overnight policy rate. The primary objective of monetary policy is to maintain inflation within a target range of 1% to 3%, with a specific target of 2%. When inflation is above target, the Bank typically raises rates to cool economic activity and reduce price pressures. When inflation is below target or the economy is weakening, the Bank typically cuts rates to stimulate borrowing and spending.
The 2022-2023 Rate Hiking Cycle
The Bank of Canada’s rapid rate increases between March 2022 and July 2023 — raising the policy rate from 0.25% to 5.0% — had a profound effect on Canada’s housing market. Variable mortgage rates rose by approximately 4.75 percentage points over 16 months, dramatically increasing monthly payments for variable-rate borrowers and sharply reducing purchasing power for prospective buyers. Home prices fell from their early 2022 peaks in most Canadian markets.
The Rate Cutting Cycle (2024-2026)
As inflation came under control through 2024, the Bank began cutting rates, a process that continued through 2025 and into 2026. Each 25 basis point cut directly reduces variable mortgage rates and improves affordability for buyers. The cumulative effect of multiple rate cuts has been a meaningful improvement in buyer purchasing power, which has supported a gradual recovery in housing market activity and prices in most markets.
What Buyers Should Do
Homebuyers should monitor Bank of Canada communications closely, including rate announcements and the Monetary Policy Report, to stay informed about the current rate environment and the Bank’s assessment of future conditions. Working with a mortgage broker who can advise on fixed vs variable rate strategy in the current environment is particularly valuable. Given the uncertainty of rate forecasts, ensuring you can manage payments under a range of rate scenarios before committing to a purchase remains essential financial prudence.
