Ottawa | 7-Oct-2025, 15:30 IST — Filed via Better Dwelling

In a striking policy debate, the Bank of Canada (BoC) has acknowledged that mortgage interest costs may be distorting official inflation readings. Deputy Governor Rhys Mendes suggested the central bank could reconsider how “underlying inflation” is defined, potentially changing the metrics that guide interest rate decisions

Why Mortgage Costs Skew Inflation

Mortgage interest costs have surged in recent years, partly due to higher policy rates post-pandemic.
These costs are a direct by-product of monetary policy itself, which means the BoC’s own rate hikes inflate the CPI basket.
Critics argue this creates a feedback loop: raising rates to fight inflation makes measured inflation worse, prolonging the cycle.

Deputy Governor’s Provocative Remark

Rhys Mendes told an audience last week that Canada may need to rethink the classification of mortgage interest in consumer price indices. His statement highlighted that:

CPI-trim and CPI-median — currently branded as the “preferred measures” — may no longer give a clean view of inflation.
If mortgage costs remain inside these indices, the Bank risks over-tightening or misjudging inflationary pressures.
Re-defining “underlying inflation” could give policymakers more clarity on whether to cut or hold rates.

Implications for Mortgage Borrowers

Borrower Profile	If Mortgage Costs Stay in CPI	If Mortgage Costs Are Excluded
Variable-rate holder	Slower rate cuts, prolonged higher payments	Earlier relief as BoC sees lower “core” inflation
Fixed-rate renewals	Renewals priced with caution, higher margins	Lower renewal rates if bond yields soften
First-time buyers	Reduced affordability window	Potential easing in stress test if inflation shifts

Market Reactions So Far

Bond yields dipped slightly after Mendes’ comments, suggesting markets expect a softer inflation path if mortgage costs are stripped from the metrics.
Some economists, however, warn that removing mortgage interest could mask the true burden households face, creating credibility risks for the BoC.
Mortgage brokers say clients are confused: many ask why their personal payments keep rising while official inflation reports may soon downplay those costs.

What to Watch

BoC’s October policy statement — whether “preferred” inflation measures are still emphasized.
Government stance — Statistics Canada may need to adjust its CPI methodology.
Credibility debate — If Canada diverges from U.S. practices, bond investors will watch carefully.

Why It Matters

For homeowners, this isn’t just a statistical tweak — it could decide how quickly rates come down in 2026. If mortgage costs are excluded from inflation, rate cuts may arrive earlier. But if left unchanged, Canadians could face longer stretches of high payments even as the economy cools.

Mortgage interest isn’t just a household bill anymore — it’s at the center of Canada’s economic policy debate.

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