Bank of Canada Raises Key Interest Rate to 2.5%, Ending Year-Long Pause
The Bank of Canada lifted its key interest rate to 2.5 per cent, the first change in nearly a year, amid concerns that high oil prices from the Iran war could fuel broader inflation. The hike threatens Canada's stagnant housing market, particularly for buyers with variable-rate mortgages.
The Bank of Canada has raised its key interest rate to 2.5 per cent, marking the first rate change in nearly a year and ending an extended period during which borrowing costs were held at 2.25 per cent. Throughout much of the previous year, the central bank kept rates steady despite significant economic headwinds, including an oil-price shock stemming from the Iran war and collapsed trade talks with the United States.
The decision to raise rates was driven by concerns that elevated oil prices linked to the conflict in Iran could translate into broader inflation across the economy. However, there is disagreement over whether the Bank of Canada should have increased rates this week given recent economic data.
The rate hike is expected to negatively impact Canada’s already stagnant housing market, putting a lid on any potential rebound. Robert Kavcic, senior economist at BMO Capital Markets, stated that the increase could immediately make home purchases more expensive for buyers. The impact is likely to be felt most acutely by consumers who have recently signed variable-rate mortgages, as these products have become significantly cheaper than fixed rates. Further rate hikes could deepen the housing downturn in weak segments such as the Vancouver and Toronto condo markets.
Economists are sharply divided on the future path of interest rates. Royce Mendes, managing director and head of macro strategy at Desjardins, expects no further rate hikes for the rest of 2026 and only one increase in 2027. In contrast, bond swaps markets have priced in another three rate hikes over the coming year.
In other developments, the Ontario government announced it will match Ottawa’s proposed “mega” tax deduction for businesses, a measure expected to cost the province $8-billion over five years.
Major Canadian banks are also taking steps to secure their digital infrastructure. BMO, TD, and RBC have blocked third-party AI agents from accessing their platforms due to customer data security concerns.
In the aviation sector, the Competition Bureau has warned that Air Canada’s proposed expansion of its partnership with United Airlines on 10 cross-border routes could lead to higher fares for travellers.
Meanwhile, Canadian sales of GLP-1 drugs have surged dramatically, rising from $350.4-million in 2020 to $3.9-billion in 2025, and are on track to reach $4.8-billion this year. Capitalizing on this growth, Apotex is launching a generic version of semaglutide, the active ingredient in Ozempic and Wegovy.
In the steel industry, Cleveland-Cliffs CEO Lourenco Goncalves criticized Industry Minister Mélanie Joly for suggesting potential buyers for Stelco, insisting that the steelmaker is not for sale.