Why isn’t the Bank of Canada lowering its key interest rate more quickly?

The eternal question. And the all-too-easy cliché response: “It all depends on the borrower’s situation.”

In fact, the simple answer has two parts:

1. If the borrower has a low risk tolerance, doesn’t want to worry about seeing their payments fluctuate, or about receiving periodic notifications (as the principal portion of the mortgage payment fluctuates), then the best choice is a 5-year fixed rate. This is the preferred option for first-time buyers entering their first mortgage term, and also for experienced borrowers who want a hassle-free option (in 71% of cases);
2. If the borrower is experienced, understands how economic changes affect short-term interest rates, plans to make frequent and significant prepayments in the coming years, and has the financial capacity to absorb the risk of interest rate fluctuations, then a variable-rate mortgage is part of their strategy.

But still, for the experienced borrower, how do you navigate the options—and when should you act? In reality, trying to beat the market to secure the lowest rate within a precise window of time usually doesn’t work. Worse, you may miss the window of opportunity altogether, and your strategy could end up costing you more in the long run.

On the other hand, a strategy based on understanding economic fundamentals and short- to medium-term trends can help you save money. The economic context drives interest rates—meaning the past is no guarantee of the future, and the future is shaped by economic and geopolitical surprises.

In the context of the 2020–2027 era, the general advice in favor of choosing a variable mortgage rate applies when the 5-year fixed rate is above 3.85%.

And why is that?

Understanding the Trends

It’s important to analyze and understand the long-term movements of the economy, as they’ve historically shaped the fluctuation of interest rates across various economic and geopolitical contexts:

• 1970–1982: The oil crisis triggered record inflation and, as a result, record-high interest rates, leading to the long and painful recession of 1981–82.
• 1982–1990: The recovery was gradual, but economic expansion gained traction once confidence was restored through drastic rate cuts. This led to an unsustainable boom by the late 1980s.
• 1990–2000: Widespread optimism drove inflation above 6%. In 1991, the Bank of Canada introduced its inflation-targeting policy. The 1990–91 recession hit hard, once again shaking consumer confidence—especially in the housing sector. It took nearly 7 years for home prices to return to 1989–1990 levels. Combined with a monetary policy focused on keeping inflation contained, the rise of computers in homes and businesses, along with sustained growth in international trade, contributed to steadily falling inflation rates. Globalization was increasingly viewed as a key economic strength.
• 2001–2008: Globalization accelerated, reducing the cost of consumer goods. Tech inputs became more efficient and affordable, and inflation continued trending downward until 1999. But in 2001, the geopolitical shock of September 11 changed global policy forever and abruptly halted the rate hikes of 1999–2000 meant to curb inflation. The Bank of Canada followed the U.S. lead, slashing its key rate to a historic low. This unprecedented monetary stimulus created a booming economy… which, left unchecked and unregulated, led to the 2008 financial crisis.
• 2009–2019: To emerge from the financial crisis, central banks slashed their policy rates to near zero. Globalization was in full swing, keeping structural inflation very low. Central banks were stuck in a liquidity trap—unable to raise rates to restore monetary policy tools without risking economic damage or triggering fears rooted in fresh economic and geopolitical shocks. The Bank of Canada managed to raise its key rate to 1.5%—until a certain virus disrupted the global economy.

Our Reference Period: 2020–2027

In March 2020, the Bank of Canada saw the economy plummet due to the COVID-19 pandemic, which brought economic and social activity to a halt. Rates were slashed to levels similar to 2008 and held low through 2020–21 to stimulate the economy and boost household spending.

In 2022, households returned with unprecedented consumer activity, encouraged by low interest rates and ample savings. But supply chains weren’t ready—the shelves were empty, and inflation spiked rapidly and sharply. The Bank of Canada had to act against this persistent inflation, aggressively raising its key rate to its highest level in 23 years by the end of 2023. The Bank maintained a restrictive policy to bring inflation back to the 2% target.

Since then, inflation has declined toward the 2%–3% range, enabling a gradual rate cut of 200 basis points in under 18 months.

In 2025, the newly elected U.S. President launches a global trade war. Fears of recession and stagflation begin to spread. Unemployment rises. Governments face significant accumulated debt. The Western economy struggles with major productivity issues… and inflation threatens to surge again due to escalating international tariffs.

In this new era, the Bank of Canada cannot allow itself to fall into a liquidity trap by dropping its policy rate below 2%. The Bank will try to maintain its rate in the 2.25%–2.75% range (resulting in a prime rate around 4.5%–5%), in an effort to support economic stimulus without triggering runaway inflation.

We’ll also likely see higher risk premiums on longer-term rates (due to increased bond supply needing higher yields in this economic context), and short-term rates that resemble those seen from 2018 to 2023 over the next three years.

The new era will bring historic levels of volatility.

The redefinition of the global economic landscape between the U.S. and China, geopolitical tensions and wars, the U.S. economic war driven by its imperialist globalization agenda, unmanaged public debt across most G7 countries, and credit rating downgrades in Canada and North America—all of these factors will create instability in the markets.

This will inevitably lead to a risk premium from investors: the movement of capital is proportional to the level of risk premium in response to uncertainty.

We can expect the Bank of Canada to proceed with great caution, aiming to preserve domestic stability in an increasingly unstable global environment.

Table: Forecast for Updated Mortgage Rate Trends
(Assuming a 25 bps volatility range for the 5-year rate)

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