The Bank of Canada Will Hold in September—And Rates Held All Week

Why We Expect a Hold Next Month

We expect the Bank of Canada to hold its overnight rate at 2.25% when it meets on September 2nd. The case for a pause is straightforward—inflation dropped sharply in June, all three core measures are back inside the 2% target band, and the labour market remains soft enough to keep wage pressure in check.

The Bank struck a cautiously optimistic tone at its last decision, noting that growth is picking up and inflation outside of gasoline remains near their 2% goal. They signalled they would cut again if oil prices stay well below April's peak and consumer prices ease back toward 2% by early next year, especially if labour-market slack persists. But a fresh surge in oil driven by the Middle East conflict, or inflation staying above 3% for several more months, would force them to keep rates on hold until they see clearer evidence that price pressures are fading.

The data since that decision supports a hold. Energy prices have retraced some of their post-ceasefire drop, but they have not spiked. Headline inflation fell to 2.8% in June from 3.23% in May, and the three core measures the Bank watches most closely all landed between 1.8% and 2.6%. That gives them room to wait and assess whether the cool-down sticks or whether geopolitical risk reignites price pressures. Our view is they sit tight through the summer and reassess in the autumn.

The Numbers Behind the Call

Total consumer price inflation fell to 2.8% year-over-year in June, down from 3.23% the prior month. CPI-Trim, one of the Bank's preferred core measures, dropped to 1.8% from 2.0%. CPI-Median came in at 1.9%, down from 2.1%. CPI-Common, the stickiest of the three, eased to 2.6% from 2.7%. All three core measures are now back inside the 1% to 3% control range, and two are sitting right at or below the 2% target.

The labour market remains in what the Bank calls a state of excess supply—unemployment has hovered around 6.5% to 7% for eighteen months. That gives the economy room for non-inflationary growth, but it also means consumers are not in a position to bid up prices aggressively. Analysts we follow continue to flag trade uncertainty as the greater long-term threat to growth, particularly now that the US has decided not to extend CUSMA. Energy prices remain the wild card—if the Middle East conflict drags on or flares up again, the Bank's hand could be forced. For now, though, the data supports a patient approach.

What Rates Did This Week

The five-year Government of Canada bond that drives fixed mortgage pricing closed the week at 3.18%, effectively flat over the last five trading days. Bond investors had priced in a hawkish tilt from the Bank's recent statement, but when the language came in more balanced than expected, yields dipped briefly before settling back where they started.

Despite the flat bond market, lenders were busy. Forty-four rate increases landed over the last seven days, with seventeen cuts. The net effect was modest upward pressure on fixed rates, though no major repricing wave hit the market. The best five-year fixed rate available right now sits at 4.09%. The best five-year variable rate is 3.45%, a gap of 0.64%.

On a five-hundred-thousand-dollar mortgage amortised over twenty-five years, that gap translates to roughly ninety-five dollars per month in favour of variable. Over five years, choosing variable today instead of the best fixed option saves you about five thousand seven hundred dollars—assuming rates do not move. If the Bank cuts once more before the end of next year, as we expect, that savings widens.

How We Are Advising Clients Right Now

Our position today is that five-year variable rates offer the best value for borrowers who can handle near-term volatility. The Bank is more likely to cut than hike over the next twelve months, and even if they hold through the autumn, the gap between today's variable rate and the best five-year fixed is wide enough to absorb one quarter-percent hike without erasing the advantage.

That said, variable is not for everyone. If your income is unpredictable, your emergency reserve is thin, or you lose sleep over the possibility of a rate increase before your next renewal, lock in the best five-year fixed you can find. The peace of mind is worth the premium. If you are renewing this autumn or next spring and you expect your income or employment situation to stabilise within the next two years, consider a three-year fixed—it gives you certainty through the period of greatest uncertainty and brings you back to market in 2029 when we expect rates to be lower.

The decision tree is straightforward. Choose variable if you have stable income, a six-month reserve, and the temperament to ride out a quarter- or half-percent swing between now and next summer. Choose five-year fixed if you need absolute payment certainty or if your financial margin is tight. Choose three-year fixed if you are in transition—new job, recent move, planning a family—and you want a bridge to a lower-rate environment without locking in today's five-year price for the full term.

Before You Pick Variable, Read This

Variable rates only suit borrowers with stable income, an emergency reserve that can cover at least six months of expenses, and the temperament to ride out a quarter- or half-percent upward move between Bank of Canada decisions. If any of those three conditions do not apply to you, lock in a fixed rate and sleep well. The savings on paper mean nothing if a rate increase two months from now forces you to sell or refinance under duress.