Market Rates Drift Higher While the Bank of Canada Sits Out September

Our read on the September decision

We expect the Bank of Canada to hold its overnight target at 2.25% when it meets on September 2. The case for a cut is building — headline inflation fell to 2.8% in June, and all three core measures are back inside the Bank's 1-to-3-percent comfort zone — but the economy added 75,000 jobs in July, well above the 20,000 forecast, and the unemployment rate ticked down to 6.4%. That kind of strength buys the Bank time to wait and see whether new US tariffs (set to land on August 19) slow growth or push prices higher through a weaker Canadian dollar.

The Bank's own guidance supports a hold. It signalled a cautious, wait-and-see stance at the last decision, noting it would cut if unemployment climbs further above 6.8% or if consumer spending weakens more than expected. Neither has happened yet. At the same time, the Bank said it would pause or hike if tariffs drive inflation persistently above 2.5%, especially through wage pressures or currency weakness. We're not there either — wage growth slowed to 2.8% in July — but the risk is real enough to keep the Bank on the sidelines for now.

Bottom line: we see a hold in September, with the next live decision likely in late autumn once the tariff impact is clearer.

The numbers behind the call

Inflation is cooling faster than the Bank expected. Headline consumer prices rose 2.8% year-over-year in June, down from 3.23% the month before. The Bank's three preferred core measures — Trim, Median, and Common — all softened: Trim fell to 1.8%, Median to 1.9%, and Common to 2.6%. All three are now inside the 1-to-3-percent target band, and two are below the 2% midpoint. That gives the Bank room to cut if the economy weakens.

But the labour market is still strong. Canada added 75,000 jobs in July, nearly four times the consensus forecast, and the unemployment rate dropped to 6.4% — a two-year low. The gains were broad-based, split evenly between full-time and part-time work, and concentrated in the private sector. Wage growth slowed to 2.8%, which signals the economy still has room to grow without overheating.

The tension is between cooling inflation and resilient growth. Analysts we follow point out that the economy has rebounded strongly from a slow start to the year, but trade uncertainty remains the bigger long-term threat. New US tariffs land on August 19, and how those flow through to prices and business investment will determine whether the Bank cuts in the fourth quarter or holds through year-end.

What rates did this week

The market rate driving fixed mortgages — the five-year Government of Canada bond — drifted higher over the last five trading days, climbing 0.15% to land at 3.33%. That move was driven by strong domestic jobs data and lighter-than-expected inflation prints, which together pushed out the timeline for the next Bank of Canada cut. Bond markets are now pricing a hold through September and possibly into October.

Fixed mortgage rates followed. Lenders moved 20 times higher and seven times lower over the past week, and the best five-year fixed rate available today sits at 4.09%. On a $500,000 mortgage amortised over 25 years, that 0.15% bond move adds roughly $44 to your monthly payment compared to where rates sat a week ago. The best five-year variable rate held at 3.5%, which is 0.59% below the best fixed — a meaningful gap, but not wide enough to ignore the risks that come with a floating payment.

Our view: the bond move was modest and rates remain range-bound. If you're renewing in the next 60 days and haven't locked yet, the window is narrowing — but there's no reason to panic. If your closing is three months out or more, you still have time to watch how the tariff story unfolds.

How we're advising clients right now

We're steering most renewers and buyers toward a five-year fixed at 4.09%. The gap between three-year and five-year terms is negligible right now — often 10 to 20 one-hundredths of a percent — and locking for five years gives you clarity through a period when tariffs, energy prices, and Federal Reserve moves could all push inflation (and the Bank's policy rate) in either direction. If you value payment certainty and plan to stay in the home for the full term, five-year fixed wins today.

Variable at 3.5% still offers the lowest cost right now, and we believe it will likely prove cheaper over the full term — but only if you can handle volatility. The Bank is holding for now, but if tariffs push inflation above 2.5% for more than a quarter or two, the overnight rate could move higher before it moves lower. On a $500,000 mortgage, a 0.25% hike adds $72 to your monthly payment. If that swing would force you to cut groceries or skip a car repair, variable is not for you.

Three-year fixed made sense six months ago when the gap to five-year was wider. Today, with the spread nearly flat, we see no reason to give up two years of term certainty for no material savings. Choose five-year fixed if you want to set it and forget it. Choose variable if you have stable income, a cash reserve, and the temperament to ride out rate moves between now and the next cut cycle.

Before you pick variable, read this

Variable rates only suit borrowers with stable income, an emergency reserve of at least three months' expenses, and the temperament to ride out 0.25% to 0.50% upward moves between Bank of Canada decisions without losing sleep. If a $72-per-month swing on a $500,000 mortgage would force you to rework your budget or tap credit, lock into a five-year fixed today. Variable offers the lowest cost right now, but the savings disappear the moment you can't afford the next move higher.