The Bank of Canada closed out 2025 by holding its overnight policy rate at 2.25% in its December 10 announcement. The decision follows several rate cuts earlier in the year and signals that the central bank is taking a more cautious, wait-and-see approach as inflation remains a concern and economic growth stays modest.
For Canadians planning to buy a home, renew a mortgage, or refinance in 2026, this rate hold brings short-term stability but also raises important questions about what comes next. Understanding the reasoning behind the Bank’s decision can help borrowers make more informed mortgage choices.
What the Rate Hold Means for Borrowers
According to Scotiabank’s latest economic outlook, inflation pressures remain strong enough that further rate cuts are unlikely in the near term. Scotiabank economists argue that the rate cuts earlier in 2025 were intended as protection against downside risks rather than a signal that borrowing costs would continue to fall.
Scotiabank’s chief economist, Jean-François Perrault, has stated that once economic conditions stabilize, those earlier cuts could be reversed. The bank expects the policy rate could increase by up to 0.50 percentage points in the second half of 2026, making Scotiabank one of the more hawkish forecasters among Canada’s major banks.
For mortgage-seekers, this suggests that interest rates may remain relatively steady early in 2026, but the risk of higher borrowing costs later in the year is very real.
Inflation and Growth Remain the Key Drivers
The Bank of Canada’s decision to pause further cuts is closely tied to persistent inflation. While inflation has eased from its peak, underlying price pressures have proven slower to fully normalize.
Scotiabank forecasts real GDP growth of approximately 1.2% in 2025 and 1.4% in 2026, supported by government spending and a gradual recovery in business investment. At the same time, longer-term challenges such as weak productivity growth and slower population growth continue to limit Canada’s economic potential.
Given these conditions, the Bank of Canada has made it clear that maintaining price stability remains the priority, even if growth stays subdued.
Not All Major Banks Agree on the Path Forward
While Scotiabank expects rate hikes later in 2026, other major financial institutions take a more cautious view.
- RBC, TD, and CIBC expect the Bank of Canada to hold the policy rate at 2.25% through much or all of 2026.
- BMO and National Bank still see room for one additional 25-basis-point cut, particularly if economic growth weakens early in the year.
RBC economist Claire Fan has pointed to resilient consumer spending and sticky underlying inflation as reasons the Bank will struggle to justify further cuts. RBC also highlights easing mortgage renewal pressures and stronger household balance sheets as factors keeping inflation from falling more quickly.
This divergence in forecasts reflects ongoing uncertainty and reinforces why borrowers should avoid assuming that rates will move in only one direction.
What This Means for Mortgage Rates
Mortgage rates are influenced by the Bank of Canada’s policy rate, but they also reflect bond market expectations and lender risk pricing.
- Variable-rate mortgages are the most sensitive to future Bank of Canada decisions. Any rate increase later in 2026 would directly affect monthly payments.
- Fixed-rate mortgages may not change immediately, but longer-term fixed rates could trend higher if markets begin pricing in future rate hikes.
If inflation remains elevated, upward pressure on mortgage rates is likely. Borrowers who value predictability may find fixed-rate options more appealing, while variable-rate borrowers should ensure their budgets can handle potential increases.
What Mortgage-Seekers Should Expect in 2026
For buyers planning to enter the market early in 2026, the current environment offers a period of relative stability. Rates are no longer falling, but they are not rising sharply either.
However, the possibility of higher rates later in the year means timing matters. Buyers who are ready sooner may benefit from securing a rate before market expectations shift. Even small changes in interest rates can have a meaningful impact on long-term affordability.
This is especially important for first-time buyers and homeowners approaching renewal, where payment changes can significantly affect household budgets.
The Bank of Canada’s December decision to hold its policy rate at 2.25% provides clarity, but not certainty. Inflation risks remain, and several major banks believe higher rates could return later in 2026.
For mortgage-seekers, preparation is key. Staying informed, understanding how fixed and variable rates respond to economic shifts, and planning ahead can make a significant difference.
If you are concerned about rising rates, locking in a fixed-rate mortgage may provide peace of mind. If you currently have a variable-rate mortgage, reviewing your budget and exploring your options now can help reduce surprises later.
Making informed decisions today can help protect your financial flexibility throughout 2026 and beyond!
References
- Bank of Canada. (2025, December 10). Bank of Canada holds overnight rate at 2.25%. Retrieved from https://www.bankofcanada.ca/2025/12/fad-press-release-2025-12-10
- Scotiabank. (2025, December). Economic Outlook: Bank of Canada Holds Interest Rate Amid Ongoing Inflation Risks. Retrieved from https://www.scotiabank.com/ca/en/about/economic-reports.html
- RBC Economics. (2025, December). Economic Update: The Path Forward for Interest Rates in 2026. Retrieved from https://www.rbc.com/economics
- BMO Economics. (2025, December). Bank of Canada Interest Rate Outlook and Economic Forecast. Retrieved from https://economics.bmo.com/en
- TD Economics. (2025, December). Interest Rate Projections and Economic Conditions in Canada. Retrieved from https://economics.td.com/ca-boc-interest-rate-announcement