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Bank of Canada holds the policy rate steady as trade uncertainty lingers
KEY FINDINGS
- The Bank of Canada holds the overnight policy rate at 2.25%, citing caution amid trade tensions and inflation concerns.
- Inflation remains above the Bank’s 2% target, with households facing higher costs for essentials and mortgage renewals.
- Canada’s housing market shows signs of stagnation, with national home sales down 1.9% year-over-year and record-low activity in Toronto and Vancouver.
- Income growth is critical to future affordability, as Canadians adjust to higher borrowing costs and economic uncertainty.
As 2026 kicks off, the Bank of Canada (BoC) is holding its key overnight interest rate at 2.25%, opting for caution after last year’s series of cuts.
For the housing market, this pause doesn’t signal a major shift so much as a period of watching and waiting. Households renewing mortgages or considering purchases now face a landscape where borrowing costs have leveled off, but the broader economic picture remains unsettled.
Inflation remains above the Bank’s 2% target. At the same time, the upcoming renegotiation of the Canada-U.S.-Mexico Agreement (CUSMA) is adding new risks.
According to Reuters, trade tensions and U.S. tariffs are already weighing on Canada’s export-focused industries. Together, these factors make the early-2026 outlook increasingly difficult to predict.
“U.S. tariffs and trade uncertainty have weakened the Canadian economy,” said Governor Tiff Macklem in this morning’s address. “We expect very modest growth through the rest of the year with some pickup in 2026.”
For homeowners and buyers, steady interest rates and a shaky housing market mean affordability now depends less on what policymakers do next and more on whether households can handle today’s high prices and borrowing costs.
Here’s what you need to know.
Trade uncertainty weighs heavily on rate decisions
While inflation and housing costs remain key domestic concerns, the BoC’s attention is increasingly fixed on what’s happening across the border.
The upcoming CUSMA renegotiation has injected significant uncertainty, and policymakers know that any setback in trade talks could quickly ripple through Canada’s export-dependent economy.
Reuters reports that U.S. tariffs have already strained key sectors — including steel, aluminum, lumber, and autos — dampening business sentiment. And although Canadian firms became more optimistic toward the end of 2025, RBC Economics notes that caution persists, with trade tensions still posing a major risk to the 2026 outlook.
Amid this uncertainty, mortgage expert and managing partner at Swivel Mortgage Group Inc., Sung Lee says the domestic backdrop is more stable than it was a few years ago, even with a recent uptick in inflation.
“Underlying inflation pressures are much closer to where the Bank of Canada wants them, and at the same time the job market has softened compared to last year,” says Lee.
He adds that easing inflation, a cooler labor market, and the lagged effects of earlier rate hikes give the Bank room to hold steady rather than act too quickly.
Read more: As 2025 winds down, the Bank of Canada holds the policy rate at 2.25%
Labour market cools as policymakers monitor U.S. trade risks
After a strong rebound earlier in the year, Canada’s job market is now showing signs of slowing.
According to a StatCan report, Canada added only about 8,200 jobs in December, and the unemployment rate went up to 6.8% from 6.5% the month before. This slowdown came after a strong stretch from September to November, when the economy added 181,000 jobs.
Earlier in 2025, job growth was mostly flat because U.S. tariffs and trade uncertainty made businesses hesitant to hire.
Sectors that struggled with trade issues earlier in the year — such as manufacturing and transportation — are beginning to steady. But the bigger story is what happens next.
Benjamin Reitzes, managing director and Canadian rates and macro strategist at BMO Capital Markets, says the path for jobs will “really [be] contingent on how the trade negotiations go with the U.S.”
If talks go well, he says, “that will give households and businesses a lot more confidence,” but if uncertainty persists, “that is going to weigh on sentiment,” including hiring and homebuying plans.
Looking ahead, the Bank of Canada expects the economy to strengthen slowly, forecasting average GDP growth of 1.1% in 2026 and 1.5% in 2027. These are estimates that Governor Macklem says are largely unchanged from the bank’s October outlook.
Read next: 5 expenses that will cost Canadians more in 2026
Canada’s housing market stalls as uncertainty keeps buyers cautious
Canada enters 2026 with a housing market that looks more cautious than competitive.
National home sales fell 1.9% year-over-year in December 2025, according to the Canadian Real Estate Association (CREA) — a sign that even after last year’s rate cuts, many buyers stayed on the sidelines amid economic anxiety and rising unemployment.
Some markets, especially Toronto and Vancouver, posted their lowest sales levels in two decades. CREA notes that Toronto recorded just 62,433 sales in 2025, the weakest year since 2000, while Vancouver saw about 23,800 homes sold, a downturn even steeper than during the 2008 financial crisis.
For buyers in high-priced regions hoping for a spring rebound, the Bank of Canada’s decision to hold the overnight rate won’t deliver a quick turnaround. As Reitzes explains, lower rates would “obviously be supportive,” but the market remains uneven across the country.
“It is a very regional market at the moment,” he says. “Ontario and B.C. have been struggling far more than everywhere else.”
From a mortgage perspective, Sung Lee says stability, rather than a surge, is the real story of 2026.
“When rates stop moving, people stop waiting,” he explains.
Once buyers see steadier conditions, they’re more willing to get pre-approved for mortgages and make home purchasing decisions. “That doesn’t mean prices take off,” he adds. “In tight markets, returning demand can firm prices, but in most places, it just means more activity and fewer stalled listings. Stability doesn’t create a frenzy — it gets the market functioning again.”
Why income growth—not rate cuts—will shape future affordability
With interest rates no longer at emergency lows, Canadians are adjusting to higher borrowing costs as the new normal. That means the real driver of future affordability won’t be dramatic policy shifts, but whether people feel their earnings can reliably support the cost of living.
“We’re going to need years of income growth to really improve affordability,” Reitzes says. Rates, rents, and home prices tend to move slowly, he notes, so rising wages will have to carry most of the load.
Lee puts the household reality into focus. “Mortgage affordability isn’t just about the rate — it’s about whether people feel secure in their income,” he says.
Households have managed higher payments largely because they remained employed. Even modest improvements in job conditions can make renewing or buying feel “manageable instead of risky,” but lasting relief will depend on stronger, sustained income growth.
Until incomes catch up, both experts say many Canadians will continue to feel stretched, regardless of how long the Bank of Canada holds the policy rate steady.
Aya AlHakim, Data reporter
Aya Al-Hakim is a data reporter with Rates.ca. Previously, she worked as an online journalist, reporting on a wide range of topics including business, politics, and health. Her work has been featured in Global News, CBC, Yahoo Lifestyle Canada and Canadian Business.
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