Core Inflation Forces the Bank of Canada Into Holding Pattern

The Bank of Canada leaves its benchmark policy rate at 2.75% as fresh inflation data from both sides of the border confirms “tariff-flation” is more than theoretical; we’re now starting to see it in everyday purchases. Though not yet an economic emergency, central banks, including the Bank of Canada (BoC), remain cautiously frozen, uncertain about their next move. Mortgage holders and would-be homebuyers must now prepare for an extended period of rate uncertainty.

June inflation data for Canada and the US both pointed to persistent underlying price pressures, with only modest differences in scale. In Canada, headline inflation rose to 1.9% year-over-year, in line with expectations and up from 1.7% in May. Core inflation, which the Bank of Canada closely monitors, edged up, averaging 3.05%, slightly above the 3% forecast. The inflation breadth also expanded, with 39% of the CPI basket seeing price increases above 3%, compared to 37% the previous month.

In the US, inflation followed a similar path, with headline inflation increasing from 2.4% to 2.7%, and core inflation rising slightly to 2.9%. While Canada’s inflation is more rooted in domestic service sectors, both countries are starting to feel the growing influence of tariffs, which are expected to add further pressure on prices in the months ahead.

Although headline figures appear manageable, they’re misleadingly low, skewed downward by the recent repeal of the carbon tax. Excluding this factor, Canada’s headline inflation would have registered closer to 2.5%, according to National Bank Economics.

The genuine concern lies in the underlying core inflation in Canada, which has been hovering around 3.4% over the last three months. This sustained pressure undermines hopes for near-term rate cuts. “The BoC prided itself for having been earlier to ease than most other central banks, but arguably cut too far and too fast without concrete evidence that core inflation was waning and policy is now arguably too loose going into major uncertainties surrounding inflation risk,” warns Derek Holt, Chief Economist at Scotiabank. 

With core inflation stuck above target, growth holding up better than expected, and the potential for more government spending to keep demand elevated, there’s a growing case that the Bank of Canada may be done cutting altogether this monetary cycle.

Stagflation Risks Rising

The persistent combination of high inflation and stagnant economic growth is sparking whispers of stagflation, something the BoC hasn’t had to address in decades. With core inflation stubbornly sticking above target and economic growth remaining tepid, policymakers face an unenviable choice: either tighten preemptively to curb inflation or wait for growth to naturally cool prices.

Royce Mendes, Chief Economist at Desjardins, offers cautious optimism: “We still expect slower population growth, upcoming mortgage renewals, and weaker business investment to eventually lead the central bank to resume rate cuts in September.” However, the reality remains uncertain, leaving mortgage borrowers with lingering doubts.

While tariff impacts remain moderate for now, TD Economics anticipates intensifying pressures later this summer, particularly if additional US tariffs are implemented. Capital Economics echoed these concerns: “We anticipate more marked price increases later this year, particularly if US tariff threats escalate further from August onward.“

Inflation Expectations and Mortgage Rates

Inflation expectations matter as much as inflation itself, profoundly influencing mortgage rate trends. Consumers expect Canadian inflation to stay above 4% next year, far beyond the BoC’s target. High expectations can create a self-fulfilling cycle, prompting businesses to raise prices and consumers to brace for higher costs, reinforcing inflationary momentum.

Despite recent BoC surveys showing that consumer inflation expectations have barely improved, business outlooks have shown modest improvement. Yet, businesses remain cautious, reluctant to hire or invest significantly due to ongoing tariff uncertainty. In its most recent Business Outlook Survey, the BoC stated, “Nevertheless, uncertainty around financial, economic and political conditions remains the top concern for firms. While worries about tariffs directly affecting Canadian businesses have eased slightly, new concerns have emerged about the broader impacts of tariffs on the global economy and on demand in Canada. Uncertainty is still causing firms to hold off on new investment plans and to conservatively manage their finances, among other actions.”

How Bank of Canada Rate Changes Affect Your Mortgage Payments

For example, if you have a $500,000 mortgage secured at nesto’s 5-year variable low rate of , your monthly payment would be $2,721. On every $100,000 balance, your mortgage payment will be $544, while you’ll be stress-tested on a mortgage payment of $647 if you’re looking to purchase a home or refinance your mortgage.

_{Common mortgage amounts and corresponding mortgage payments on nesto’s 5-year variable low rate of on a 25-year amortization. Qualified mortgage payments affect all home purchases and mortgage refinances, and they are qualified on stress-tested payments based on the contract rate plus 2%.}

July 2024 vs. July 2025: What’s Different?

How Has Housing Affordability Changed in the Past Year? Renting vs. Owning

Today, Canada’s benchmark home price is $693,300, while a year ago, it was $717,800, which has decreased by 3.4%. However, the lowest 5-year variable mortgage rate at nesto has decreased from 5.40% a year ago to today. These changes mean that Canada’s average monthly mortgage payment has decreased from $4,150¹ to $3,396². This implies that nationally, the average insurable mortgage payment decreased by 16.39% from a year ago. In comparison, during that same period, Canada’s average national rent decreased by 2.2% from $2,144.78 to $2,108, which in dollars is $33.78 year-over-year.

_{*1 and 2: Values for mortgage payments calculated based on nesto’s variable rate over a 25-year amortization period with a 20% downpayment using the average/benchmark home price in the stated month as reported by CREA for the location.}

Canada’s 2-Year Yield Predicts Higher Policy Rate

According to mortgage analyst Robert McLister, “For the first time in more than two years, Canada’s 2-year yield is trading above the overnight target rate.” That might seem minor, but it’s historically one of the strongest signals that a rate hike, and not a cut, could be coming.

McLister explains that, since 1994, every time five specific conditions aligned, two-year yields rising above the BoC’s overnight rate, the policy rate remaining unchanged for at least three months, the last move being a cut, and both rates sitting below their 50-month averages, the Bank of Canada’s next move was always a hike. 

This pattern has occurred 45 times over the past three decades, with an average lag of 8.5 months between the signal and the rate hike. If this pattern holds, today’s low fixed and variable rates may not last. The perfection of 45-for-45 is hard to ignore.

What This Means for Mortgage Borrowers

Given this historically consistent indicator, borrowers should approach adjustable and variable rates cautiously and seriously consider locking into a fixed-rate for protection against increasing rates. Based on the current dynamics, borrowers face critical choices:

• Homebuyers: Consider locking into attractive fixed rates before they rise further.
• Renewers: Anticipate stable or rising rates at renewal, and it’s best to secure early rate guarantees.
• Variable-rate borrowers: Ensure sufficient financial flexibility to handle potential rate volatility ahead.

Mortgage Strategy Matters More Ever

The Bank of Canada may be in pause mode, but the data isn’t standing still. With core inflation heating up, consumer expectations remaining above 4%, and Canada’s 2-year bond yield flashing a historically accurate signal for future rate hikes, the odds of deeper cuts anytime soon are shrinking rapidly. Add in tariff uncertainty and cautious business investment, and borrowers can’t afford to take a passive approach.Now more than ever, it’s critical to match your mortgage strategy to the moment. Whether you’re buying, renewing, or riding out a variable rate, connect with a nesto mortgage expert for personalized advice paired with the best mortgage rate. Advice that keeps you ahead of the curve and protected against what’s next.

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