Bank of Canada Paused the Policy Rate at 2.25%
Bank of Canada Paused the Policy Rate at 2.25% as Global Constraints Dominated the Decision
The Bank of Canada kept its policy interest rate unchanged at 2.25% in today’s decision, extending a pause that followed an aggressive easing phase earlier in the cycle. The Bank framed the decision as appropriate given current inflation readings, moderate growth, and elevated uncertainty tied to global trade and financial conditions. Economists and bond markets anticipated the outcome, but the Bank’s accompanying communication carried greater significance than the decision itself. Policymakers used the pause to reassert control over expectations, clarify limits on near-term action, and respond directly to speculation that rate hikes could re-enter the conversation later in 2026.
Why the Policy Pause Occurred Despite Resilient Headline Growth
Canadian economic data entering the decision showed headline resilience that masked underlying weakness. Gross domestic product (GDP) expanded at a pace that exceeded forecasts in the second half of 2025, but trade arithmetic drove much of that strength. Imports declined faster than exports, mechanically lifting net trade’s contribution to growth. Federal and provincial governments accounted for most incremental spending, while private-sector investment remained subdued. Businesses preserved cash, delayed expansion, and limited hiring commitments.
Households sustained consumption by drawing down savings and increasing debt balances. Job creation continued, but employers disproportionately added many part-time and lower-wage positions. Average wages grew faster than inflation, yet consumer confidence declined as households focused on job security, housing costs, and debt servicing capacity. These conditions gave the Bank sufficient justification to pause without signalling confidence in the economy’s continuing expansion.
Inflation Conditions That Supported a Dovish Pause
Inflation trends allowed the Bank to keep rates unchanged without abandoning its inflation mandate. The headline consumer price index (CPI) rose modestly in December, primarily due to tax-related base effects that distorted year-over-year comparisons following the prior GST/HST holiday. Measures that excluded indirect taxes and volatile components told a more informative story. Core and trim CPI registered their smallest average monthly increases since early 2024, indicating that underlying price pressure is easing.
Price pressures varied sharply across categories. Grocery prices continued to rise at an elevated pace, driven by global food costs and reduced cattle inventories. Shelter costs remained elevated due to lagged effects from past housing inflation. Energy prices declined sharply following the removal of the consumer carbon tax in most provinces earlier in the year. Monetary policy could not meaningfully influence these forces in the short term, and the Bank acknowledged that reality directly in its statement.
Global Bond Markets and the Constraint on Fixed Mortgage Rates
The Bank’s policy pause carried limited influence over fixed mortgage rates because bond markets, not central banks, set longer-term borrowing costs. Canadian fixed mortgage pricing tracked Government of Canada bond yields, which continued to move in close alignment with US Treasury yields. That linkage mattered as US bond markets continued to behave atypically during the current easing cycle.
The US Federal Reserve reduced its policy rate multiple times while US inflation remained above target and fiscal deficits expanded. Bond markets and investors responded by pushing long-term Treasury yields higher rather than lower. Economist David Rosenberg highlighted the contrast, noting that prior easing cycles saw 10-year Treasury yields decline alongside policy cuts, whereas the current cycle has produced a significant increase. Bond investors signalled concern that rate cuts risked entrenching inflation rather than restoring price stability.
That signal crossed the border, but Canadian bond yields remained range-bound while retaining an upward bias, limiting any pass-through from domestic policy pauses to fixed mortgage pricing. The Bank acknowledged that external financial conditions constrained its ability to influence household borrowing costs.
Labour Markets, Confidence, and the Limits of Monetary Support
Labour market data reinforced the Bank’s decision to pause rather than pivot. Employment gains slowed in December after substantial gains earlier in the quarter, and the unemployment rate rose as more Canadians entered the labour force. Permanent layoffs declined, and trade-exposed sectors stabilized after earlier losses. These developments aligned with the Bank’s assessment that slack was absorbed gradually rather than abruptly.
Business and consumer surveys pointed to cautious optimism rather than renewed momentum. Businesses reported weaker year-over-year sales growth but expected modest improvement ahead—fewer businesses budgeted for a recession, yet many planned cost containment rather than expansion. Consumers expressed concern about high prices, housing costs, and debt obligations, and spending intentions remained restrained. Monetary policy could stabilize conditions, but it cannot restore confidence quickly amid trade uncertainty and geopolitical risk.
Housing Markets Adjusted to Stability Rather Than Stimulus
Housing markets responded more to confidence and income expectations than to changes in the policy rate. An analysis by the Bank of Montreal described affordability improvements as a gradual process rather than a cyclical rebound. National prices declined materially from early 2022 peaks, with sharper adjustments in investor-heavy segments such as pre-construction condominiums. Resale markets saw widening gaps between asking prices and bids, boosting buyers’ negotiation leverage.Low-rise housing with limited supply remained more resilient, while condominium markets in Toronto and parts of southern Ontario faced further downside risk. Rental markets softened as population growth slowed and new supply entered the market. The policy pause reinforced a reality that housing recovery would depend on income growth and alignment between home prices and fundamentals, not renewed rate stimulus.
How Affordability Shifted Across Canada
How Bank of Canada Rate Changes Affected Home Prices, Mortgage Qualification and Interest Costs Across Canada
Housing Affordability: Year-Over-Year Changes in Home Prices
The first and most visible affordability constraint remained the price of housing itself. While national benchmarks often suggest home prices are stabilizing, price movements can vary materially by province, altering the upfront capital required to enter homeownership. In some provinces, benchmark home prices declined year over year, mechanically improving affordability. In other cases, home prices remained elevated or continued to rise, thereby reinforcing barriers to entry. However, price adjustments alone did not determine affordability outcomes, particularly where financing costs remained restrictive.
| Home Prices January 2026 | Home Prices January 2025 | Year-over-Year $ Difference | |
|---|---|---|---|
| Canada | $660,300 | $687,700 | $27,400 |
| BC | $894,000 | $955,500 | $61,500 |
| AB | $498,200 | $509,300 | $11,100 |
| SK | $359,000 | $335,600 | -$23,400 |
| MB | $392,045 | $360,233 | -$31,812 |
| ON | $749,400 | $794,200 | $44,800 |
| QC | $529,600 | $494,300 | -$35,300 |
| NB | $334,100 | $328,900 | -$5,200 |
| NS | $412,900 | $405,100 | -$7,800 |
| PE | $373,300 | $370,800 | -$2,500 |
| NL | $335,100 | $304,300 | -$30,800 |
Mortgage Affordability: Income Required to Qualify for the Same Home
Home prices represented only one component of affordability. Mortgage affordability depended on qualifying income, prevailing interest rates, and lender underwriting standards. The table below shows how the required household income to be eligible for the same benchmark home changed year over year using a consistent qualification framework. In several provinces, required incomes changed unevenly compared to home prices, as borrowing costs offset price changes. This divergence explained why affordability metrics improved in theory while access to mortgage credit remained constrained in practice.
| Qualifying Income January 2026 | Qualifying Income January 2025 | Year-over-Year $ Difference | |
|---|---|---|---|
| Canada | $121,979 | $125,842 | $3,863 |
| BC | $166,093 | $171,323 | $5,230 |
| AB | $97,058 | $99,972 | $2,914 |
| SK | $72,796 | $74,897 | $2,100 |
| MB | $95,339 | $97,633 | $2,294 |
| ON | $139,561 | $143,945 | $4,384 |
| QC | $102,517 | $105,615 | $3,098 |
| NB | $76,518 | $78,472 | $1,954 |
| NS | $78,488 | $80,903 | $2,415 |
| PE | $76,711 | $78,895 | $2,184 |
| NL | $63,419 | $65,380 | $1,960 |
Homeownership Affordability: Changes in Interest-Carrying Costs
Affordability pressures did not end at mortgage approval. Households ultimately faced the ongoing cost of servicing mortgage debt. The final comparison isolates the interest portion of mortgage payments to show how the cost of carrying a home evolved year over year. In most provinces, interest-carrying costs changed in proportion to interest rates. Even so, financing costs remained materially higher than before the tightening cycle, shaping renewal or refinancing options and limiting near-term payment relief for existing homeowners.
| Interest-Carrying Costs January 2026 | Interest-Carrying Costs January 2025 | Year-over-Year $ Difference | |
|---|---|---|---|
| Canada | $94,305 | $107,402 | $3,220 |
| BC | $127,682 | $149,226 | $4,448 |
| AB | $71,153 | $79,540 | $2,207 |
| SK | $51,273 | $52,413 | $1,588 |
| MB | $55,992 | $56,260 | -$1,315 |
| ON | $107,030 | $124,035 | $4,029 |
| QC | $75,638 | $77,198 | $1,681 |
| NB | $47,717 | $51,366 | $1,259 |
| NS | $58,971 | $63,267 | $3,553 |
| PE | $53,315 | $57,910 | $924 |
| NL | $47,859 | $47,524 | $1,277 |
Why These Affordability Measures Matter for Monetary Policy
Viewed together, these three measures explain why affordability adjusted unevenly as broader economic conditions evolved over the last 12 months. Home prices moved unevenly, mortgage qualification remained highly sensitive to interest rates, and homeownership costs stayed elevated across much of the country. These dynamics reinforced the reality that monetary policy influenced affordability primarily through financing conditions rather than price correction alone, supporting a cautious, data-dependent policy stance over time.
*For illustrative purposes only, when comparing against nesto’s 5-year lowest fixed insurable mortgage rates, with a 20% downpayment & 25-year amortization, using Canada’s composite average home price data as made available through CREA. Other limiting terms & conditions apply. Rates are subject to change without notice.
Mortgage Strategy in a Paused Policy Environment
The policy pause shifted mortgage decision-making away from time bets on fixed vs variable and toward structural choices. Variable-rate mortgages (VRM) remain unchanged, as lenders price them off their prime rate, which is influenced by the Bank’s policy rate. Fixed mortgage rates hovered near long-term averages, but spreads between 3- and 5-year terms widened amid persistent volatility in the bond market. In contrast, our mortgage rates forecast expects higher fixed-rate pricing over the long term.
Borrowers choosing fixed-rate mortgages faced diminishing opportunities to extend certainty without paying a premium. Variable rates continued to offer lower expected borrowing costs over the full term, but only for households with sufficient cash flow resilience to manage volatility. The Bank’s communication made clear that a pause did not represent a pivot toward easing. Borrowers who continue to rely on imminent cuts to restore affordability misread the policy signal.
What the Policy Pause Signalled About the Path Ahead
Governor Macklem used the press conference to push back against market narratives that anticipated rate hikes later in 2026. He emphasized that tariff-related inflation did not respond to higher interest rates and that GDP data overstated economic strength. He reiterated that uncertainty remained elevated and that the Bank stood ready to respond if conditions changed. That language defined the pause as dovish in tone but restrictive in stance.
The Bank positioned policy as appropriately calibrated rather than transitional. Canada’s CPI Inflation continues to hover near the target, growth stabilized without accelerating, and global financial conditions limited domestic flexibility. The pause preserved optionality without committing to further cuts or signalling tolerance for renewed inflation risk.
Mortgage Strategy in a Cycle Defined by Stability, Not Stimulus
The Bank of Canada’s decision to keep its policy rate unchanged at 2.25% reflected constraint rather than complacency. Domestic data supported stability, while global bond markets and trade uncertainty limited the effectiveness of further action. For Canadian mortgages, the pause delivered clarity without relief. Homebuyers gained negotiating leverage. Homeowners considering renewing or refinancing gained pricing certainty and time, not guarantees. In today’s market, mortgage strategy and structure, and risk tolerance matter more than predicting the next policy move. Contact nesto mortgage experts for a personalized mortgage strategy grounded in today’s best mortgage rate and policy reality rather than yesterday’s playbook.
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