The Bank of Canada Cuts Policy Rate by 0.25%

The Bank of Canada cut its policy rate by 25 basis points this morning, bringing it to 2.50%, surprising few but raising questions about how far the easing cycle will go. With economic growth contracting, unemployment climbing, and US policy shifting in the same direction, Governor Tiff Macklem judged that the risks of holding steady outweighed the risks of fuelling inflation. 

The slight uptick in August CPI, which edged headline inflation back to 1.9% and left core measures hovering near 3%, did little to alter the Bank’s trajectory. Instead, policymakers stressed that domestic slack and fading tariff impacts provide enough cover for modest rate relief.

Economic Backdrop for the Rate Cut

Canada’s economy shrank sharply in the second quarter, contracting 0.4% quarterly and 1.6% annualized, the worst since the pandemic. Exports collapsed by 27%, business investment faltered, and employment losses deepened in trade-sensitive regions. Yet not everything was bleak. 

Household demand and housing activity showed surprising resilience, with consumer spending advancing 4.5% and residential investment rising 6%. The mixed picture complicated the Bank’s task but ultimately reinforced the view that weakness is spreading beyond exports, leaving policymakers little choice but to act.

On CPI inflation, the BoC acknowledged that CPI-trim and CPI-median remain near 3%, above target. But officials argued the momentum is cooling, noting the 3-month average of core inflation has slowed to 2.4%. The removal of counter-tariffs and easing wage pressures were cited as signs that inflation risks are manageable.

Markets had already priced in the move, with 5-year Government of Canada bond yields falling six basis points last week to 2-month lows. Traders now see a strong chance of another cut by year-end, though the Bank carefully avoided signalling a preset path.

GDP Contracts

The Bank’s decision hinged heavily on output data. While final domestic demand grew at a 3.5% annualized pace, the export collapse dragged overall GDP into negative territory. Scotiabank and CIBC economists noted that the headline weakness masked resilience, but the broader labour market deterioration confirmed that weakness was spreading.

Inflation Expected to Drift Lower

The Bank overlooked the persistence of 3% core CPI readings, arguing that base effects and tariffs had distorted the picture. With Ottawa’s rollback of retaliatory measures and weaker wage growth, policymakers expect inflation to drift lower into 2026.

US Economy Adds Pressure on the Bank’s Decision

South of the border, the economic picture remained cloudy enough to keep bond traders glued to the Fed’s upcoming announcement. On the one hand, the US labour market has slowed dramatically. Non-farm payrolls in August gained only 22,000 jobs, well below expectations, while earlier months were revised lower, showing outright losses in key manufacturing regions. Unemployment has crept to 4.3%, its highest level in almost 4 years. Wage growth has eased back toward 3.7% annually, further evidence that inflationary wage spirals are losing steam.

On the other hand, inflation itself has not cooperated. The Fed’s preferred measure, core PCE, rose 0.3% month-over-month in July and stands at 2.9% year-over-year, the highest in 5 months. Services inflation remains stubborn, and consumer expectations for prices one year ahead have ticked up to 4.8%, according to the University of Michigan. With tariffs still in place on a broad basket of imports, economists warn of renewed “tariff-flation” should firms begin passing higher costs along.

This is the dilemma facing the Fed tonight. Its dual mandate obliges it to fight inflation while sustaining employment, yet the two goals are pulling in opposite directions. Political rhetoric has only raised the stakes: President Trump has openly pressured Chair Jerome Powell to cut more aggressively, even as some of his own appointees to the Fed board voice dissent. That leaves markets almost certain of a 25-bps trim but uncertain about the guidance that follows.

For Canada, the Fed’s choice matters because US yields anchor global funding costs. A dovish Fed could drag Canadian bond yields lower, reinforcing today’s BoC cut. But if Powell’s tone leans hawkish, warning that inflation risks remain elevated, the relief Canadian borrowers expect could prove fleeting.

Consumer and Business Sentiment

The latest Business Outlook Survey showed firms holding back on investment and hiring, with nearly half citing tariffs as a lingering cost. The Canadian Survey of Consumer Expectations revealed that two-thirds of households are bracing for a recession, with job loss fears elevated. Together, these surveys provided the Bank with cover: when both households and businesses are pulling back, monetary support can help shore up confidence.

Real Estate Market Predictions

Housing markets showed cautious signs of life even before the cut. Home sales rose for a 5th straight month in August, according to CREA, with Montreal, Vancouver, and Ottawa seeing the strongest gains. Home prices remain subdued nationally, with the benchmark down 3.5% year-over-year, but the rate cut may bring sidelined buyers back. Oxford Economics projects a bottom in early 2026, but near-term relief could accelerate stabilization. Canadian mortgage brokers report that lower stress-test hurdles are already reviving mortgage pre-approvals.

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%.}

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

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

Today, Canada’s benchmark home price is $686,800, while a year ago, it was $710,800, which has decreased by 3.4%. However, the lowest 5-year variable mortgage rate at nesto has decreased from 5.15% a year ago to today. These changes mean that Canada’s average monthly mortgage payment has decreased from $3,914¹ to $3,364². This implies that nationally, the average insurable mortgage payment decreased by 14.05% from a year ago. In comparison, during that same period, Canada’s average national rent decreased by 1% from $2,143.22 to $2,122, which in dollars is $21.22 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.}

The Impact of the Bank’s Decision on Mortgage Rates

For mortgage borrowers, today’s cut reinforces a trend of slowly improving affordability. Fixed rates had already started to edge lower on the back of falling bond yields, and the policy move provides further momentum. Insured 4-year fixed terms were already slipping below 4%, with Canada’s institutional lenders trimming rates in anticipation. 

Variable rates, directly linked to prime, saw immediate relief, with adjustable-rate (ARM) holders seeing their monthly payments decrease and variable-rate (VRM) holders seeing more of their monthly payment going to their principal repayment. Renewers, who have been bracing for steep payment jumps, now see a modest but welcome cushion. For homeowners looking to refinance, lower stress-test rates could ease qualification hurdles, though lenders remain conservative amid rising unemployment.

Mortgage Strategies for Homebuyers

For homebuyers, today’s policy interest rate cut improves qualification and monthly payment math, though affordability remains stretched. Renewers should weigh variable options more seriously, as the economy sputters, causing the BoC to stay on its monetary easing path. Homeowners looking to refinance face cautious underwriting challenges, but lower borrowing costs improve the case for debt consolidation. Clients looking to lock into a fixed rate should get their mortgage pre-approvals in place, given the possibility that further easing in the months ahead could drive long-term bond yields, and with it fixed rates, higher.

The Bank Focused on Risk Mitigation

The Bank of Canada’s decision to cut rates underscores its focus on jobs and growth over short-term inflation noise. With domestic slack widening and global conditions softening, the central bank judged that modest easing posed less risk than holding steady. 

For Canadians, the implications are clear as borrowers gain incremental relief, markets see further cuts as plausible, and housing could stabilize sooner than expected. Yet this is no return to the ultra-low rates of the pandemic era. The Bank framed today’s move as careful calibration, not a rush into a full easing cycle.

Contact nesto mortgage experts for your personalized mortgage strategy.

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