Bank of Canada leaves overnight rate unchanged at 2.25% at the January meeting
Steady state from the Bank of Canada? One might think so, with rates unchanged at 2.25% at today’s policy meeting, but the truth is a little more complex. Uncertainty rules the roost, and not just here in Canada. As our Prime Minster recently said at Davos, we have ‘a rupture in the world order…’
I heard PM Carney’s speech and it was spot on the money. What is going on is of course problematic for anyone trying to gauge the future, including the Bank of Canada. They have stayed the course on rates simply because they have little other choice. According to the Bank, inflation has subsided slightly, making a move lower on rates a future possibility.
Why that is likely is fairly obvious. At the moment, we are saddled with existing tariffs, a re-working of CUSMA, continual on again/off again threats of new tariffs, annexation, and general ill will from the 47th President. He has no respect for conventions, allies, trade agreements or anything else.
Canada has weathered this storm reasonably well but our economy likely stalled out in the last quarter. Trade uncertainty and tariffs are definitely impacting our prospects. Employment figures have risen but few businesses are considering hiring in the near future. With inflation on target, and uncertainty ahead, it makes sense to stay put on rates. Cutting rates now will leave us with fewer options in the future should conditions materially weaken. Some excerpts from the press release below:
Economic growth is projected to be modest in the near term as population growth slows and Canada adjusts to US protectionism. In the projection, consumer spending holds up and business investment strengthens gradually, with fiscal policy providing some support. The Bank projects growth of 1.1% in 2026 and 1.5% in 2027, broadly in line with the October projection. A key source of uncertainty is the upcoming review of the Canada-US-Mexico Agreement.
CPI inflation picked up in December to 2.4%, boosted by base-year effects linked to last winter’s GST/HST holiday. Excluding the effect of changes in taxes, inflation has been slowing since September. The Bank’s preferred measures of core inflation have eased from 3% in October to around 2½% in December. Inflation was 2.1% in 2025 and the Bank expects inflation to stay close to the 2% target over the projection period, with trade-related cost pressures offset by excess supply.
The lowest available January 2026 rates are:
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1-year fixed insured 4.69%
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2-year fixed insured 4.29%
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3-year fixed insured 3.64%
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4-year fixed insured 3.84%
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5-year fixed insured 3.74%
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5-year variable insured 3.40%
Is the mortgage stress test still a thing in 2026? Yes it is, and with the higher rates we’ve seen, it’s even harder to qualify for a mortgage. The rules require you to qualify at either 2% above the rate your lender is offering you or 5.25%, whichever is higher.
Being forced to qualify at the higher stress test rate causes the principal portion of your monthly mortgage payment to shrink, lowering the maximum amount you’ll be allowed to borrow for your mortgage. But the rate you’ll actually pay once you buy is the rate you are offered by your lender. Your monthly payments will be calculated from this lower rate, not the stress test rate. As a result your monthly mortgage bill will be smaller too.
The stress test has been quite unpopular so the federal government has rolled out several new changes to make it easier to buy a home. They are now offering a first time buyer’s credit of $5000, and an increase in withdrawals from your RRSP to $35,000.
In addition existing borrowers are no longer required to re-qualify at the stress test rate when they renew or refinance their mortgages. This will allow borrowers some flexibility if they want to choose a different lender as they are no longer under the pressure of qualifying at an additional two percentage points.
If you’re looking for mortgage info or help please reach out.
