Bank of Canada Cuts Rate!

About six weeks ago, markets were pricing only a 13% chance of a Bank of Canada cut on September 17. As new data rolled in, that probability kept climbing until a 0.25% move was virtually guaranteed. That’s the thing about forecasts… employment, inflation, and broader economic signals can swing, reports can surprise, and forecasts shift with every new release. No one knows the outcome ahead of time, and even strong odds aren’t guarantees.A day before today’s decision, Statistics Canada posted August CPI at 1.9% year over year (up from 1.7% in July). Rising inflation on paper… yet the Bank still cut. Why? Because markets were braced for 2.0%. The “softer-than-expected” inflation report, paired with clear signs of slowing growth, effectively gave the BoC room to ease.

Why the BoC Moved Despite Higher CPI Inflation

• Inflation vs. expectations: Inflation rose, but fell short of the 2.0% consensus. 

• Growth cooling: Canada’s Q2 2025 GDP fell 1.5%, reflecting tariff and trade uncertainty and its impact on economic activity. 

• Labour softening: Unemployment has risen for two straight months to 7.1%... excluding the pandemic years of 2020–2021, the highest since May 2016.

Put together, the backdrop gave the Bank of Canada the green light… even as they keep one eye on inflation risks.

What This Means for Variable-Rate Mortgages

Anyone currently in a variable rate mortgage… or shopping for one, will see their rate drop by 0.25%. How this impacts you directly will depend on what type of variable rate product you’re currently in: 

• Adjustable-rate (ARM): Payments drop roughly $13 per month per $100,000 of mortgage after a 0.25% cut. Note that this number will change slightly depending on the number of years remaining on your amortization period. 

• True variable rate: Payment stays the same but a larger percentage will now be applied to principal and less to interest. 

Should You Consider a Variable Rate Mortgage?I don’t suggest deciding based on a single rate announcement. There are 40 scheduled announcements over a 5-year term. This is just one of them. More cuts are still expected, but expectations aren’t outcomes. If we look back to the beginning of 2022, forecasts were calling for the Bank of Canada to increase their rate by 1.00% to 1.25% by the end of the year. But then the war in Ukraine broke out, which cause a significant disruption to the supply chain which fueled inflation. This new information resulted in hikes of 4.00% by the end of the year… far greater than what the original forecasts were calling for. 

Those with adjustable-rate mortgages saw their payments rise to uncomfortably high levels. 

Those in true variable rate mortgages received letters from their bank informing them that they hit their trigger rate, where their payment is no longer enough to cover the interest on the mortgage.

These are the risks of choosing a variable rate mortgage. While variable rates are now starting to look more promising than they did in the past few years, they are not for everyone.

There are five key considerations when deciding between a fixed or a variable rate, which I cover in detail in my blog, “The Ultimate Guide to Choosing Fixed vs. Variable.”

What This Means for Fixed-Rate Mortgages

When the Bank of Canada cuts its rate by 0.25%, many people assume fixed mortgage rates will also drop by 0.25%. That’s not the case. BoC announcements have a direct and immediate impact on variable-rate mortgages because lenders adjust prime. Fixed rates, however, are priced mainly off Government of Canada bond yields… which can have a mind of their own. They can even move in opposite directions at times… meaning fixed mortgage rates can as well. 

Perfect example: In the fourth quarter of 2024, the Bank of Canada cut their rate by 1.00%. Over the same period, we saw fixed mortgage rates increase by roughly 0.30% across the board. 

Even today, the Bank of Canada cut by0.25%, yetbond yieldsare up roughly 2.00% at the time of writing. The BoC cuts, but yields rise. It sounds backwards, but it isn’t.

The main reason is that today’s cut was no surprise. Bond yields had already fallen substantially since mid-July as markets priced in the growing odds of a September cut. By decision day, most of that move was already baked in, so there was no fresh push for yields to drop further.

So why the bump today? Easier policy can stimulate inflation over time, and the bond market reacts badly to rising inflation risks. As a result, yields can rise even when the BoC is cutting.

Big picture, yields are still well below their mid-July peak, and several lenders have already trimmed fixed rates. Today’s uptick isn’t a concern on its own and won’t have ANY impact on fixed rates. One day doesn’t make a trend; it would only matter if yields began climbing consistently. For now, the overall pressure on fixed mortgage rates remains downward.

Final Thoughts

Rate drops are always exciting, and we’ll take whatever we can get! Barring any unforeseen events that drive inflation, more cuts from the Bank of Canada are still expected, including one more by the end of 2025. 

While the Bank of Canada announcements do not have an immediate or direct impact on fixed rates, downward pressure persists. Today’s upward tick in bond yields is just regular market movement. Much like a stock, a trend is never in a straight line. Let’s hope the downward trend continues, which would lead to lower fixed rate mortgages coming soon. Time will tell and anything can happen.