Bank of Canada Trims Policy Rate as Inflation Persists

The Bank of Canada lowered its overnight policy rate by 25 basis points to 2.25% at its October 29 meeting, marking a second consecutive cut following September’s move. The decision reflected the central bank’s cautious attempt to support slowing growth while keeping inflation expectations in check.

Governor Tiff Macklem emphasized that while inflation progress has been uneven, monetary policy now sits “within the neutral range,” suggesting further easing will depend on data confirming disinflation is on track. Heading into today’s meeting, there was broad market consensus for a 0.25% cut, with bond-market pricing implying roughly 90% odds, reflecting the Bank’s dovish guidance at the September 17 decision.

Inflation Edged Higher but Remains Controlled

September’s consumer price inflation (CPI) data complicated the Bank’s decision. Headline CPI rose to 2.4%, up from 1.9% in August and above consensus expectations. The increase was driven mainly by a smaller year-over-year drop in energy prices and ongoing shelter cost pressures. Meanwhile, the Bank’s preferred core inflation measures, CPI-trim and CPI-median, held firm above 3%, with their 3-month trends edging higher.

Governor Macklem noted that “underlying inflation remains elevated and broad-based services inflation continues to show persistence.” Despite this, the Bank acknowledged that inflation expectations among households and businesses are easing, and energy prices are less volatile than earlier this year.

Two weeks after the September meeting, Deputy Governor Rhys Mendes also downplayed an over-reliance on core gauges, reiterating that the Bank looks at a broad dashboard and currently estimates overall inflation at about 2.5%, which provides limited but real room for additional easing.

Economic Growth Flatlines as Job Market Softens

Canada’s economy continues to show signs of strain. GDP was flat in August following a Q2 contraction, and business sentiment remains subdued. According to the Bank’s latest Business Outlook Survey, many firms are scaling back hiring and investment plans, while two-thirds of consumers expect a mild recession in the next 12 months.

The labour market, once a pillar of strength, has softened meaningfully. The unemployment rate rose to 7.1%, and wage growth slowed below 4% for the first time since 2022. Job vacancies have declined, and part-time employment now accounts for a larger share of job creation, underscoring the shift toward a more balanced but weaker labour market.

Macklem also cautioned against overreacting to a single stronger-than-expected September jobs report, characterizing current labour conditions as “soft.” The Bank’s Q3 surveys reinforced that downbeat tone, with roughly one-third of businesses planning for recession and about two-thirds of households preparing for one, consistent with weak hiring and investment intentions.

Why the Bank Cut Again Despite Sticky Core Inflation

The Governing Council faced a difficult balancing act. On the one hand, persistent core inflation made another rate cut risky. On the other hand, weak growth and declining business confidence increased the case for further easing.

The Bank ultimately prioritized supporting domestic demand amid global headwinds. The recent removal of Canadian counter-tariffs and easing of US import duties reduced imported inflation pressures. At the same time, the federal government’s fall fiscal update signalled limited new spending, reducing the risk of monetary-fiscal conflict.

The Bank described the decision as a “measured adjustment” aimed at ensuring borrowing costs remain aligned with the target for the neutral rate, between 2% and 3%. By the Bank’s own assessment, the policy rate is not yet stimulative until it declines to at least about 2%, which implies scope for one or more additional cuts if disinflation proceeds as expected.

Housing Activity Rebounds Cautiously

Housing activity showed early signs of stabilization, but the rebound remains fragile and dependent on interest rate expectations. CREA reported that national home sales rose modestly in September, supported by stronger demand in Toronto and Winnipeg. Average home prices remained 3% below year-ago levels, though inventory continued to rise in most markets.

Economists at Desjardins said the cut will likely extend the recovery in housing markets into 2026, but price growth will stay subdued due to higher unemployment and stricter stress-test conditions. Builders continue to complete projects started during the pandemic boom, keeping new supply elevated and tempering rapid price increases.

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 $2,650. On every $100,000 balance, your mortgage payment will be $530, while you’ll be stress-tested on a mortgage payment of $632 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%.}

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

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

Today, Canada’s benchmark home price is $682,600, while a year ago, it was $706,800, 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 $3,739¹ to $3,256². This implies that nationally, the average insurable mortgage payment decreased by $416 or 0.13% from a year ago. In comparison, during that same period, Canada’s average national rent decreased by 2.3% from $2,158 to $2,109, which in dollars is $49 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.}

What the Rate Cut Means for Canadian Borrowers

The Bank of Canada’s second consecutive rate cut signalled a decisive shift away from the tightening cycle that has defined the past two years. But even with borrowing costs easing, uncertainty remains. Mortgage rates are lower, yet qualification standards and economic headwinds continue to challenge many Canadians. Here’s how this new phase is shaping outcomes across borrower groups.

Homebuyers: Lower rates offer modest affordability relief, particularly for those choosing variable-rate or fixed mortgages. Some lenders have slightly relaxed qualifying conditions, but the federal stress test, still based on the higher of 5.25% or the contract rate plus 2%, continues to limit how much buyers can borrow. Those waiting for better entry points may find more flexibility ahead of the spring market, though not a dramatic improvement.

Renewers: For borrowers renewing mortgages this fall, payment relief is finally emerging. Many 5-year terms from 2020 and 2021 are still resetting at higher rates, but the pace of payment shock is slowing. Fixed-rate offers for uninsured terms have drifted below 5%, while variable renewals are adjusting lower as lenders pass along recent policy rate cuts. The result is a more stable, if still elevated, renewal market.

Refinancers: Canadians looking to consolidate debt or access home equity are benefiting from a gradual normalization of borrowing costs. However, lenders remain cautious, maintaining strict appraisal and debt ratio requirements. Homeowners who have experienced wage growth or hold strong equity positions and are looking to refinance stand to gain the most. While others may need to wait for inflation to move closer to 2% before credit and qualifying conditions ease further.

What the Bank Signalled for 2026

The Bank of Canada maintained a cautious tone, as the market saw today’s move as a “hawkish cut.” Policymakers reaffirmed that inflation risks persist and signalled that future rate reductions are not guaranteed. The previous Monetary Policy Report (MPR) forecasted that inflation would return close to the 2% target by late 2026, assuming global supply conditions remain stable and wage pressures continue to moderate.

The Bank reiterated that monetary policy now sits in a neutral zone, suggesting no urgency for additional cuts unless growth weakens further or inflation surprises to the downside. Given that the policy rate generally becomes stimulative only once it falls to about 2% or below, today’s move brings the Bank closer to that threshold. The BoC is likely to deliver at least one more 0.25% cut before concluding this cycle, provided disinflation stays on track.

With the US Federal Reserve expected to ease monetary policy further this afternoon and energy prices retreating, the BoC’s next few meetings will determine whether Canada continues cutting or pauses to gauge inflation’s persistence. The Bank’s measured pace signals confidence in disinflation but ongoing caution about global risks heading into 2026.

Looking to take advantage of today’s lower rates or plan your next renewal? Contact nesto mortgage experts today for a personalized mortgage strategy tailored to your goals.

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