The Bank of Canada has lowered its benchmark interest rate to 2.5%, which in turn has reduced the prime lending rate to 4.7%.
Both the Bank of Canada and the U.S. Federal Reserve are caught in a tough spot. Inflation is still higher than they’d like, but the job market is starting to weaken. This is leading to stagflation.
Stagflation occurs when prices continue to rise (inflation) while the economy slows down (stagnation) and unemployment increases. It’s rare, but it did happen in the late 1970s, and interest rates skyrocketed as governments fought to get it under control.
We’re not officially in stagflation today, but there are warning signs:
- Inflation in Canada is currently around 3%, still above the Bank of Canada’s target of 2%.
- The U.S. job market is cooling, with fewer jobs being created than originally thought.
- Central banks are concerned that lowering rates to support employment could lead to higher inflation again.
When central banks lower rates, borrowing gets cheaper. That helps businesses and job growth, but it can also fuel inflation. When they raise rates, it slows inflation, but also makes mortgages, loans, and credit cards more expensive. This tug-of-war is why mortgage rates and bond yields sometimes move in the opposite direction of what you’d expect.
What This Means for You
- Expect uncertainty: Rates could move up or down depending on which problem central banks decide to fight harder, inflation or unemployment.
- Know your risk tolerance: If you’re uncomfortable with sudden payment changes, consider fixed-rate options for mortgages or loans.
- Stay informed: The more you understand what’s driving rates, the better financial decisions you can make.
The bottom line? Being aware of the risks and staying flexible will help you navigate whatever comes next. The next Bank of Canada rate announcement is scheduled for October 29, 2025.