Why We Expect the Bank of Canada to Hold in September

Our read on the September 2 decision

We expect the Bank of Canada to hold its target rate at 2.25% when it meets five weeks from now. Inflation is cooling — headline dropped to 2.8% in June and the three core measures all sit at or below 2% — but the Bank made it clear at the last decision that it needs to see energy shocks fade before it cuts again. Oil prices spiked in April on Middle East tensions, and while gasoline inflation has eased since then, the Bank will want another month or two of stable data before it moves.

The case for a cut is straightforward: core inflation is back on target and unemployment sits above 6.5%, so there's little inflation risk from the labour market. The case for holding is equally clear: the war hasn't resolved, oil remains volatile, and the Bank doesn't want to cut only to reverse course if energy prices flare again. Our view is they choose patience in September and cut in October if inflation excluding gasoline holds near 2%.

If we're wrong — if the war de-escalates sharply or consumer demand weakens faster than expected — the Bank could surprise with a cut in early September. That would send the market rate down a quarter of a percent or more and push fixed rates lower across the board.

The numbers behind the call

Headline inflation fell to 2.8% in June, down from 3.23% in May. The three core measures the Bank watches most closely all landed at or below 2%: CPI-Trim came in at 1.8%, CPI-Median at 1.9%, and CPI-Common at 2.6%. Core inflation hasn't been this soft since early 2021. Shelter costs are still elevated — mortgage interest and rent remain the two biggest contributors to headline inflation — but the pace of increase has slowed as fixed rates come off their 2023 peaks.

The labour market remains loose. Unemployment held above 6.5% through the spring, wage growth has cooled, and job vacancies are down sharply from a year ago. That tells the Bank demand isn't running hot enough to reignite inflation on its own.

The wildcard remains energy. Analysts we follow note that global oil prices surged in April on Middle East tensions, pushing gasoline inflation higher across North America. That spike has since moderated, but the conflict hasn't resolved. The Bank's view — stated at the last decision — is that if oil prices stabilise and inflation excluding gasoline holds steady around 2%, they have room to cut. If the war escalates and drives fuel costs back toward their April peak, they'll hold until the energy shock passes.

What rates did this week

The market rate driving fixed mortgages — the five-year Government of Canada bond — sat at 3.19% today, flat over the last five trading days. Bond traders are pricing in one more cut by year-end, but they're in no rush. The gap between today's best five-year fixed rate and the best five-year variable widened slightly as lenders repriced risk: fixed sits at 4.09%, variable at 3.55%.

Lender activity picked up this week — 26 institutions raised at least one rate, while six lowered. Most of the increases were on shorter-term fixed products as funding costs edged higher. Variable rates held steady. On a half-million-dollar mortgage, a flat bond market means your payment quote today looks identical to what it was seven days ago — roughly three thousand three hundred and seventy dollars a month on a five-year fixed at 4.09%, amortised over twenty-five years.

How we're advising clients right now

Our position today is straightforward: five-year fixed wins for most borrowers renewing or buying this summer. You lock certainty at 4.09%, you know your payment for the next five years, and you remove the risk that the Bank holds longer than expected or pivots back to hikes if oil prices surge again. Yes, variable sits fifty-four hundredths of a percent lower at 3.55% — that's roughly two hundred and twenty-five dollars a month in savings on a five-hundred-thousand-dollar mortgage — but the risk-reward doesn't favour variable unless you meet the criteria in the next section.

Three-year fixed makes sense if you're confident the Bank cuts twice more by mid-2027 and you want to refinance into a lower rate sooner. Rates on three-year terms tend to price a quarter to a half percent below five-year fixed, so if you believe the overnight rate lands at 1.75% or lower within thirty-six months, locking short term and renewing early could save you money. The downside is you take on renewal risk in 2029 — if inflation resurges or the global economy overheats, five-year rates at that time could be higher than today's 4.09%.

Variable suits a narrow group: borrowers with stable income, a cash reserve covering six months of expenses, and the temperament to absorb a quarter- to half-percent increase between now and the next cut. If the Bank holds in September and oil prices climb again, variable could drift above 4% by late autumn. If that outcome would force you to cut household spending or dip into savings, fixed is the safer call.

Before you pick variable, read this

Variable rates only suit borrowers with stable income, an emergency reserve covering at least six months of expenses, and the temperament to ride out a quarter- to half-percent upward move between Bank of Canada decisions. If a two-hundred-dollar monthly payment increase would strain your budget or force you into credit products to cover the gap, variable is not for you. Lock fixed, know your number, and sleep at night.