Bank of Canada Cuts Rates to Three-Year Low, Cites Risks to Economy

The Bank of Canada (BoC) has lowered its key interest rate by 25 basis points, bringing the overnight policy rate down to 2.50%, its lowest level in three years. The move, announced on September 17, 2025, marks the central bank’s first rate cut in six months and comes amid mounting concerns about a weakening economy, slowing inflation, and growing risks in the labour market.

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Why the Rate Cut Now?

The BoC emphasized three major reasons behind its decision:

• Labour Market Softness: Canada lost roughly 65,000 jobs in August, a sharp sign that employment growth is faltering. Unemployment has been trending upward, especially in construction and retail sectors, which are highly sensitive to interest rates.
• Slower Inflation: Inflation cooled to 1.9% in August, below the BoC’s 2% target midpoint. With price pressures easing, the central bank had more flexibility to shift policy toward supporting growth.
• Economic Contraction: Canada’s economy contracted in Q2, and forecasters now expect weaker GDP growth through the rest of 2025. Business investment is soft, and consumer demand is cooling.

In its statement, the Bank acknowledged that while risks of overheating are lower, the balance of risks has shifted toward underperformance, warranting a cut.

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Impact on Borrowers

For Canadian households, the rate cut could bring relief—though the effects will differ depending on mortgage type:

• Variable-Rate Mortgages: Monthly payments will adjust downward relatively quickly, offering short-term relief to households facing financial strain. A 25 bps cut on a typical $500,000 variable mortgage could trim monthly payments by $65–$75.
• Fixed-Rate Mortgages: These are tied more to bond yields than the overnight rate, but downward pressure on 5-year government bond yields suggests fixed rates could follow in the coming weeks.
• Mortgage Renewals: For those whose mortgages are up for renewal in 2025, this cut could slightly reduce the “renewal shock.” However, since many borrowers locked in ultra-low rates back in 2020–2021, payments may still rise compared to their old terms.

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Broader Market Reaction

• Canadian Dollar: Immediately after the announcement, the Canadian dollar fell against the US dollar, signaling investor expectations of further easing. A weaker loonie could make imports more expensive but also support exports.
• Bond Markets: Yields on 5-year government bonds dipped, reinforcing expectations that fixed mortgage rates will decline.
• Housing Market: The cut could stimulate housing demand, especially in major cities like Toronto and Vancouver. However, affordability remains constrained by high home prices, meaning a modest rate cut may not fully offset structural challenges.

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Analysts’ Views

Economists are split on how far the BoC will go:

• Some expect one more cut in 2025, bringing the rate closer to 2.25% if inflation continues to ease.
• Others warn the Bank may risk fuelling housing demand at a time when affordability is already stretched.
• Mortgage brokers say demand for 5-year fixed mortgages under 4% is likely to grow if lenders adjust rates in response to the cut.

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Global Context

The BoC is not alone in easing policy. The European Central Bank and the US Federal Reserve have both signaled that slowing global growth requires a more accommodative stance. Canada’s decision adds momentum to a global shift toward rate cuts after a cycle of rapid tightening between 2022 and 2024.

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Why It Matters for Homeowners

For Canadians juggling rising costs and high debt levels, this cut signals the central bank’s acknowledgment of financial strain. While it won’t erase the challenges of high home prices or tight supply, it’s a step toward easing borrowing pressures.
For prospective buyers, the cut may improve affordability slightly, though house prices remain the larger barrier. For homeowners renewing in 2025, it may mean slightly better terms than feared just a few months ago.

The Bank of Canada’s move to cut rates to 2.50% may not solve all of Canada’s affordability challenges, but it marks a turning point in monetary policy—one that mortgage holders, buyers, and the housing market will be watching closely over the coming months.