The Bank of Canada held its policy rate steady at 2.25%, sitting at the low end of what it considers “neutral.” On the surface, that sounds uneventful.
It’s not.
As outlined in recent commentary from Dr. Sherry Cooper, Chief Economist at Dominion Lending Centres, this decision signals something far more important than just a pause in rates: we are entering a prolonged period of economic uncertainty where interest rates may not be the primary driver of outcomes.
Inflation Is No Longer the Problem — Growth Is
Inflation has largely normalized, sitting near the Bank’s 2% target, with core inflation easing to 2.5%. The Bank believes rates are “about right” assuming the economy evolves as expected.
But that’s the key phrase: assuming.
Economic growth is projected to be modest — roughly 1.1% in 2026 and 1.5% in 2027 — as Canada adjusts to slowing population growth and continued pressure from U.S. trade policy. Employment weakness earlier in 2025 was directly tied to tariff-impacted sectors, and while services hiring has helped stabilize things, the recovery remains fragile.
Trade Uncertainty Is the Real Risk
The single largest risk to Canada’s outlook is not inflation — it’s the upcoming CUSMA (USMCA) review.
Canada currently benefits from a relatively low effective U.S. tariff rate (about 5.8%) due to trade agreement exemptions. An unfavourable renegotiation could:
-
Reduce export competitiveness
-
Slow business investment
-
Pressure employment and GDP
-
Increase risk premiums across Canadian assets
Even the threat of withdrawal or renegotiation is enough to dampen confidence — something already reflected in softer business investment and consumer sentiment.
Why Fixed Rates Are Rising While Policy Rates Hold
Here’s where it gets practical.
Despite the policy rate holding steady, market-driven rates have risen:
-
The 5-year Government of Canada bond is once again pushing toward 3%
-
Fixed mortgage rates have already started to move higher
-
The Canadian dollar has strengthened
This disconnect matters. It means borrowers waiting for “rate cuts” may miss the window on fixed-rate opportunities — especially if markets continue to price in longer-term uncertainty rather than short-term relief.
What This Means for Borrowers, Investors & Developers
We’re likely past the dramatic rate swings of the last cycle. Instead, we’re entering a phase where:
-
Capital structure matters more than rate alone
-
Certainty, flexibility, and execution speed are critical
-
Lenders are increasingly selective, especially in commercial and construction lending
-
Strategic planning matters more than timing the next 25 bps move
In other words, this is no longer a rate game — it’s a structure and strategy game.
Final Thought
The Bank of Canada is doing what it can in a highly uncertain global environment. But until trade clarity improves — particularly around CUSMA — volatility and caution will remain part of the Canadian economic landscape.
Those who succeed in this environment won’t be the ones waiting for perfect conditions. They’ll be the ones who adapt early, structure intelligently, and partner with the right capital sources.
Source: Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres