Bank of Canada Warns on Overuse of “Preferred” Core Inflation Gauges

Ottawa | October 3, 2025, 12:30 IST — Filed via Canadian Mortgage Trends

The Bank of Canada has issued a cautionary note to financial markets: stop leaning too heavily on its so-called “preferred” inflation gauges.

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What Happened

Deputy Governor Rhys Mendes told a policy forum that markets may be misinterpreting the Bank’s stance by giving excessive weight to CPI-trim and CPI-median, two measures of “core” inflation.

These gauges are designed to filter out volatile items like gasoline and fresh food, offering a steadier picture of inflation trends. But according to Mendes, their “preferred” label has led investors and analysts to treat them as the only benchmarks that matter.

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Why It Matters for Borrowers

For mortgage-holders, how the Bank interprets inflation is crucial. Inflation expectations directly guide interest rate decisions, which flow into variable mortgage rates and influence bond yields that shape fixed mortgage rates.

• If markets overweight CPI-trim and CPI-median, they may assume rate cuts (or hikes) sooner than warranted.
• This can fuel volatility in bond markets, affecting 3-year and 5-year fixed mortgage pricing.
• For households budgeting renewals, clarity on the Bank’s broader inflation lens helps anticipate future costs.

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The Bank’s Review of Terminology

Mendes revealed the Bank is considering whether to drop the term “preferred” when referring to these gauges. The idea is to signal that while CPI-trim and CPI-median are useful, they are not exclusive guides.

Instead, the Bank stresses it looks at multiple measures — including CPI-common, wage growth, and broader price indexes — when forming policy.

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Market Reaction

Initially, the statement nudged Canadian government bond yields higher, as traders recalibrated expectations. Analysts said the Bank’s warning could temper overly aggressive bets on early rate cuts.

The loonie (CAD) remained under pressure, trading near 4½-month lows against the U.S. dollar, partly due to falling oil prices.

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Risks for Homeowners

The Bank’s communication highlights a potential risk: if inflation readings are misread, markets may price mortgages incorrectly.

• Borrowers locking into fixed rates could pay a premium if markets expect higher inflation than the Bank truly sees.
• Conversely, if markets assume inflation is tamer than reality, sudden repricing can catch households off guard at renewal.

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Broader Policy Context

This caution comes just a day after the Bank confirmed it is reviewing whether to exclude mortgage interest costs from core inflation altogether — another sign of policymakers rethinking how inflation should be tracked in a high-debt economy.

The combination of both reviews suggests a deep re-examination of Canada’s inflation toolkit in 2025, with direct consequences for housing affordability and mortgage dynamics.

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Outlook

The Bank of Canada is expected to update its communication strategy by year-end, potentially changing how inflation metrics are presented in policy statements.

For homeowners and prospective buyers, this signals continued uncertainty in mortgage rates. Analysts expect more volatility in fixed offerings until the Bank clarifies which gauges it prioritizes.

Borrowers should stay alert: while rate cuts are still possible in late 2025, the Bank is reminding markets not to over-read a single metric.