Role of the Bank of Canada | Monetary Policy and Mortgages

Q: What is the Bank of Canada's primary mandate?

The Bank of Canada's primary mandate is to keep inflation low, stable, and predictable. Since 1991, the target has been set at 2%, the midpoint of a 1% to 3% control range. This mandate is renewed every five years through an agreement with the fédéral government.

Q: How does the policy rate influence mortgage rates?

The Bank of Canada's policy rate determines the cost at which commercial banks lend to each other overnight. When it rises, banks raise their prime rate, which pushes up variable mortgage rates and home equity lines of credit. Fixed rates are more influenced by Government of Canada bond yields.

Q: How many times per year does the Bank of Canada announce its policy rate?

The Bank of Canada makes eight rate announcements per year, following a predetermined schedule published at the beginning of each year. Each announcement is accompanied by a press release, and four coincide with the publication of the Monetary Policy Report.

Q: Why should a mortgage broker follow Bank of Canada decisions?

Bank of Canada decisions directly affect mortgage borrowing costs. A broker who understands monetary policy can better advise clients on the choice between fixed and variable rates and anticipate rate movements.

Q: Does the Bank of Canada directly set mortgage rates?

No. The Bank sets the policy rate, which influences the prime rate of financial institutions. Lenders déterminé their own mortgage rates by adding a spread to the prime rate or basing them on bond yields.

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The Fundamental Role of the Bank of Canada

The Bank of Canada, founded in 1934 under the Bank of Canada Act (R.S.C. 1985, c. B-2), is the country's central bank. Its primary mission is to promote the economic and financial well-being of Canadians. Unlike commercial banks such as Royal Bank, TD Bank, or Desjardins, it does not deal directly with the public and offers no banking services to individuals. Its influence is exercised through monetary policy, a set of decisions that affect the entire Canadian economy and, by extension, the mortgage market. The Bank is led by a Governor appointed for a seven-year term. It employs approximately 2,000 people at its Ottawa headquarters and maintains regional offices. Its operational independence allows it to make monetary policy decisions without direct political interference, although it is accountable to Parliament through the Minister of Finance.

The Inflation Mandate: The 2% Target

Since 1991, the Bank of Canada and the fédéral government have agreed to maintain inflation at a target of 2%, the midpoint of a control range from 1% to 3%. This agreement is renewed every five years; the most recent, signed in December 2021, maintained the 2% target while adding a consideration for maximum sustainable employment. Inflation is primarily measured by the Consumer Price Index (CPI) published monthly by Statistics Canada. When inflation exceeds the target, the Bank tends to raise the policy rate to slow economic activity and curb price increases. When inflation is too low or the economy underperforms, it lowers the rate to stimulate borrowing, investment, and consumption. The Bank also uses core inflation measures, notably CPI-trim and CPI-median, to assess the underlying price trend by excluding the most volatile components.

The Policy Rate: Mechanism and Transmission

The policy rate, officially called the overnight rate target, is the rate at which major financial institutions lend funds to each other for a one-day period on the money market. The Bank of Canada sets this rate and uses it as a lever to influence all interest rates in the economy. The transmission mechanism works in a cascade: when the policy rate rises, commercial banks increase their prime rate (generally almost immediately and by the same amount), directly impacting variable mortgage rates, home equity lines of credit (HELOCs), and adjustable-rate loans. Fixed rates, meanwhile, are more influenced by Government of Canada bond yields, particularly the 5-year bond, which reflects market expectations for inflation and future monetary policy.

Recent Policy Rate History

The recent policy rate history illustrates the potential volatility of monetary policy. In March 2020, facing the COVID-19 pandemic, the Bank rapidly cut the rate from 1.75% to 0.25%, its effective lower bound, to support the economy. This exceptionally low rate fuelled the housing market, triggering unprecedented price increases across several Quebec markets. Then, facing inflation that reached 8.1% in June 2022, the Bank launched the most aggressive hiking cycle in a generation, bringing the rate to 5.00% by July 2023 through ten consecutive increases. This reversal shocked variable-rate borrowers and significantly cooled the real estate market. Starting in June 2024, the Bank began gradually reducing the policy rate, signalling a shift toward monetary easing.

Impact on the Quebec Real Estate Market

In Quebec, the real estate market is particularly sensitive to Bank of Canada decisions. A policy rate increase reduces buyers' borrowing capacity by raising the qualifying rate (OSFI B-20 stress test). Conversely, rate cuts stimulate demand and can lead to overheating in certain markets. Between 2020 and 2022, Montreal, Gatineau, Sherbrooke, and Trois-Rivieres experienced dramatic price increases fuelled by historically low rates. The 2022-2023 reversal restored some balance, but prices corrected only moderately in Quebec compared to Ontario or British Columbia. Mortgage brokers regulated by the AMF must understand these dynamics to properly advise clients, both for new purchases and renewals.

Variable rate: directly tied to the prime rate, which follows the policy rate with a spread of approximately 2.20%
Fixed rate: influenced by 5-year Government of Canada bond yields, plus the lender's credit spread
Home equity line of credit (HELOC): prime rate plus a spread set by the lender, typically 0.50% to 1.00%
Adjustable-rate mortgage (ARM): payment changes with each policy rate modification, unlike classic variable where only the principal/interest split changes
Hybrid rate (combined): fixed portion and variable portion, allowing rate risk diversification

The Eight Rate Announcements and the Monetary Policy Report

The Bank of Canada publishes an annual schedule of eight fixed dates for policy rate announcements, typically on a Wednesday at 10 a.m. Eastern Time. Four of these announcements coincide with the publication of the Monetary Policy Report (MPR), a detailed document analyzing the Canadian and global economy, presenting inflation and growth projections, and identifying risks. The other four announcements are accompanied by a shorter press release. The Governor holds a press conference after each announcement accompanied by the MPR. For mortgage brokers, these dates are strategic moments: it is essential to inform clients in the purchasing or renewal process, prepare scenarios, and be ready to quickly communicate the implications of the decision.

Key Takeaways for Brokers

For a mortgage broker in Quebec, the Bank of Canada is the starting point of any market analysis. Following rate announcements, reading press releases, and understanding the Monetary Policy Report allows brokers to anticipate rate movements and position their clients optimally. The savvy broker also monitors the key economic indicators the Bank considers in its decisions: CPI and its core measures, the unemployment rate, GDP growth, the housing market, inflation expectations, and the global economic context. By combining this macroeconomic analysis with thorough knowledge of available mortgage products, the broker can offer truly strategic advice, going beyond simple rate comparisons to become a trusted financial advisor.