Bank of Canada June 2025 Rate Decision: Outlook for Mortgage Renewers

Inflation Trends: Cooling Headline, Sticky Core

Canada’s inflation picture has recently improved on the surface – but underlying price pressures remain stubborn. Headline consumer price index (CPI) inflation fell to 1.7% year-over-year in April 2025, down from 2.3% in March. This drop pulled headline inflation below the Bank’s 2% target for the first time in over two years, providing some welcome relief to consumers. Several factors drove the decline: the federal carbon tax was eliminated on April 1, 2025, immediately shaving roughly 0.7 percentage points off annual inflation. Energy prices have also plunged – gasoline is about 18% cheaper than a year ago and natural gas prices are down 14%, thanks to lower global oil prices and the tax change. Even food price growth has eased slightly as global commodity costs recede. The Bank of Canada had anticipated a soft headline CPI around 1.5% this spring due to these factors, so April’s low reading was not a surprise.

However, core inflation tells a different story. Stripping out volatile items, underlying inflation remains above target – and in fact ticked higher in April. The Bank’s preferred core measures, CPI-Median and CPI-Trim, accelerated to 3.2% and 3.1% respectively. These are the highest core readings in over a year, indicating that domestic cost pressures (for services, shelter, wages, etc.) are still running hot. For six months now core inflation has hovered around the 3% mark, underscoring the sticky underlying momentum in prices. In April, even if energy costs are excluded, inflation would have been about 2.9% – up from 2.5% in March, masking trouble beneath the headline slowdown. This divergence between cooling headline CPI and elevated core CPI complicates matters for the Bank of Canada. Households see overall inflation falling and may expect rate relief, yet the Bank is confronted with core metrics above 3%, which flash warning signs. Officials have warned that tariff-driven cost spikes (from ongoing trade disputes) could keep core prices high, and they are determined not to let one-time price jumps become “embedded” in expectations. Bottom line: inflation is no longer the acute threat it was last year, but underlying price growth is still too strong for comfort – a key factor in the June 4 rate decision.

GDP and Employment: Signs of Economic Slowdown

If inflation data present a mixed picture, economic growth and jobs data are more clearly pointing to a slowdown. After a burst of growth in late 2024, Canada’s economy lost momentum in early 2025. Real GDP shrank by 0.2% in February 2025, the first monthly decline since late 2024. Some of this was payback from a one-off boost in January, when manufacturers rushed to ship exports before new U.S. tariffs hit. Overall, the Bank estimates first-quarter GDP grew only around 1.5% annualized – a marked deceleration from the strong rebound in Q4 2024. More recent indicators suggest the second quarter could be even weaker: business investment and consumer spending have slowed, and new U.S. duties on Canadian steel, aluminum, and autos are already denting exports. The Bank of Canada cautions that an escalating trade war could even tip Canada into a mild recession later in 2025 if conditions worsen.

The labour market is also showing strain. After healthy job growth late last year, employment has stalled out this spring. Canada lost 33,000 jobs in March and managed to add only 7,400 jobs in April, essentially flat employment over two months. This has pushed the unemployment rate up to 6.9% as of April. Outside of the 2020 pandemic shock, 6.9% represents the highest jobless rate in about 8 years. Sectors exposed to trade are hurting badly – for example, manufacturers cut 31,000 positions in April as U.S. orders dried up. Retail and wholesale trade employment also fell. The pool of unemployed workers has swelled 14% compared to a year ago, and more than 60% of people who were jobless in March were still searching in April. Wage growth is modest at 3.4% for permanent workers, barely above inflation, suggesting slack in the labor market rather than an overheating economy.

These soft economic indicators are increasing pressure on the Bank of Canada to provide stimulus. Weak demand and rising joblessness typically argue for lower interest rates to support growth. Indeed, some economists warn that without relief, the job market “could soon buckle” under the strain. The Bank of Canada has indicated it stands ready to “act decisively” if conditions deteriorate significantly. However, the counterpoint is that those stubborn core inflation readings limit how far and fast the Bank can ease. As we head into the June decision, the situation is finely balanced between two forces: a weakening economy that would normally call for rate cuts, and persistent price pressures that call for caution.

Bank of Canada’s Recent Commentary and Guidance

Facing these cross-currents, the Bank of Canada’s official communications have struck a cautiously neutral tone. In the last rate decision on April 16, 2025, Governor Tiff Macklem and the Governing Council opted to hold the overnight rate at 2.75%, breaking the streak of cuts. They explained that while inflation had come down, core prices were still too high, and new U.S. trade tariffs had introduced major uncertainty. Macklem emphasized that the Bank must prevent tariff-driven cost surges from feeding into sustained inflation – in other words, they didn’t want to stimulate the economy with another cut at a time when supply shocks were pushing prices up. By pausing in April, the Bank aimed to reaffirm its commitment to price stability even as growth was slowing.

Policymakers have highlighted the “pervasive uncertainty” caused by the U.S.–Canada trade conflict and indicated that they will be data-dependent going forward. In its April Monetary Policy Report, the Bank actually sketched out two scenarios: one where tariffs are resolved and growth resumes near trend, and another “worst case” of a prolonged trade war causing recession and high inflation from tariffs. With outcomes ranging from a mild slowdown to stagflation, the Bank is essentially in wait-and-see mode. Governor Macklem said the Bank will “proceed carefully” and be “less forward-looking than usual until the situation is clearer,” prepared to adjust policy quickly once the path becomes evident. Importantly, officials have repeated that they are prepared to move in either direction – they will support growth if needed but also will not hesitate to tighten policy if inflation gets out of control. In sum, the current guidance is that no strong bias has been signaled for June; the Bank has kept its options open. They are effectively threading a needle: acknowledging that headline inflation is low and growth is faltering (which would favor cuts), while also stressing that core inflation must cool before they can safely loosen policy further. This careful stance sets the stage for a closely-watched decision on June 4.

Market Expectations and Bond Yield Trends

Financial markets and economists are split – but leaning slightly toward a hold in June. In late May, a Bloomberg survey of economists found 17 out of 30 expect the Bank of Canada to keep rates unchanged on June 4, while 13 forecast a cut. That roughly 60/40 tilt in expert opinion reflects the same mixed signals the Bank is grappling with. Market pricing of interest rate futures has similarly shifted toward expecting no immediate change. After the hotter core inflation readings in April, traders dramatically reduced bets on a June rate cut: the implied probability of a cut fell from around 60–65% before the inflation data to roughly 30–40% afterward. As of the end of May, currency swap markets put the odds of a June hold as high as 70–75%, with only a one-in-four chance of a cut priced in. In other words, a rate pause is now seen as the most likely outcome, whereas an additional cut is viewed as possible but not assured. Virtually no analysts anticipate a rate increase at this meeting, given the clear signs of economic weakness and the fact that overall inflation is below target.

Bond investors have been responding to these expectations. Government bond yields – which heavily influence fixed mortgage rates – have seesawed with each twist in the economic outlook. Earlier in the year, as rate cuts accumulated and recession fears grew, Canadian bond yields fell significantly. For example, the 10-year Government of Canada yield slid from a peak of about 3.6% in January down to ~3.0% by March. Two-year yields (more directly tied to short-term rate expectations) dropped from around 3.15% in January to about 2.37% in early April. However, yields rebounded in late April amid uncertainty over inflation and heavy government bond supply. By mid-April the 10-year yield was back up near 3.5%, and the 2-year climbed back above 2.5%. This volatility reflects a market torn between growth fears (which pull yields down) and inflation fears (which push yields up) as the trade war drama unfolds.

Overall, the trend in recent weeks has been a slight decline in yields as markets price in eventual BoC easing. Many forecasters still expect the Bank to cut rates further in the coming quarters (for example, TD Economics projects the overnight rate falling to 2.25% by year-end). This has put gentle downward pressure on longer-term yields. Five-year Canadian bond yields, which underpin 5-year fixed mortgage rates, are expected to “decrease by less than 0.5% by the end of 2025,” according to one major bank’s forecast. In short, neither a dramatic plunge nor spike in rates is anticipated at this point – rather, markets are positioned for a modest drift lower in rates, punctuated by uncertainty. For homeowners, this means fixed mortgage rates have likely stabilized or edged down slightly in anticipation of future cuts. As of early June, typical discounted 5-year fixed mortgage rates in Canada are in the mid-4% range, having eased off their highs, while variable rates (often quoted as prime minus a discount) are around the mid-4% as well. We now turn to what the Bank’s actual decision – whether a cut, hold, or hike – would imply for those mortgage rates.

Outlook: Will the Bank Cut, Hold, or Hike on June 4?

Taking all the evidence together, the most probable outcome on June 4, 2025 is that the Bank of Canada will hold its overnight rate steady at 2.75%. This is the scenario favored by a slight majority of economists and reflected in current market odds. The rationale is that officials will want more clarity on the competing forces at play. On one hand, the economy’s clear weakness and rising unemployment argue that interest rates are too restrictive and additional stimulus would be helpful. On the other hand, core inflation above 3% is uncomfortably high, and the Bank’s mandate dictates that it not let inflation expectations slip out of control. By holding in June, the Bank can buy time to observe a few more months of data – essentially keeping its powder dry until it’s sure which way to move. As BMO’s rate strategists noted, the April core inflation uptick “does not support additional cuts” in the very near term, suggesting a second straight pause is the safer course. Governor Macklem himself has stressed the need to see convincing cooling in core prices before unleashing more easing.

That said, a rate cut cannot be ruled out – it’s still a distinct possibility if the Bank weighs the scales differently. Roughly 40% of analysts do expect a 0.25% cut on June 4, and the Bank’s own surveys showed many market participants anticipating a cut around mid-year. If incoming data (e.g. late-breaking trade developments or financial market stress) were sufficiently grim, the Bank could decide to proactively trim rates to support confidence. Indeed, some forecasters argue the Bank should “resume its loosening cycle” now, given clear evidence of a weakening job market. The consensus among Canada’s big banks (aside from one outlier) is that rates will be lower by the end of 2025, and several had penciled in a June cut in their projections. It truly is a close call. The Bank of Canada has characterized this policy juncture as a “finely balanced” one between weak growth and firm prices. Homeowners should be prepared for either outcome on June 4, though a hold is slightly more likely unless the economic data between now and the decision tilt decisively one way.

As for a rate hike, that scenario appears highly unlikely at this meeting. Virtually no economists foresee the Bank raising rates on June 4, given that overall inflation has come down below target and the economy is under strain. It would probably take a major positive shock (like an abrupt end to the trade war combined with a spike in inflation expectations) for the Bank to consider hiking rates now. Policymakers have signaled that the current 2.75% rate is around “neutral” and no longer needs to be higher to restrain the economy. Barring an unforeseen surge in inflation, homeowners can reasonably discount the chance of a rate increase in the immediate term.

Bottom line: A cautious hold at 2.75% is the base-case prediction for June 4. The Bank will likely reiterate a data-dependent stance, keeping the door open for cuts later in the year if the economy continues to soften (or, conversely, leaving open the possibility of hikes if inflation were to unexpectedly reignite). Now, with that outlook in mind, let’s explore how each potential decision – cut, hold, or hike – would affect Canadians’ mortgage rates, both fixed and variable.

Potential Rate Decisions and Impact on Mortgage Rates

The Bank of Canada’s overnight rate directly influences variable-rate mortgages and indirectly influences fixed-rate mortgages. Here’s what each scenario on June 4 could mean for your mortgage:

• Rate Cut (Easing): If the Bank cuts the overnight rate (for example, from 2.75% to 2.50%), Canadians with variable-rate mortgages would likely see immediate relief. Variable rates are tied to the prime lending rate, which moves in lockstep with the BoC’s rate. A 0.25% cut in the overnight rate usually leads banks to cut their prime rate by 0.25% as well. For variable mortgages with fixed payments, a lower rate means more of each payment will go toward principal rather than interest, helping you pay down the balance faster. For those with adjustable payments, your monthly payment would decrease, directly reducing your mortgage bill. Overall borrowing costs across lines of credit and variable loans would become a bit cheaper. Fixed mortgage rates, however, do not change overnight with a BoC cut – fixed rates are determined by longer-term bond yields, not the Bank’s rate on its own. In the short term, a rate cut could nudge fixed mortgage rates downward if bond markets anticipate more easing and lower inflation ahead. In fact, the expectation of BoC cuts is often already baked into bond yields by the time a cut occurs. So, a June cut might lead to modest further declines in 5-year bond yields, which could translate into slightly lower 5-year fixed mortgage rates over the ensuing weeks. But don’t expect a large immediate drop in fixed rates purely due to the announcement. The impact would be more gradual and dependent on whether markets believe additional cuts are coming.
• Rate Hold (Status Quo): If the Bank holds the rate at 2.75%, the status quo is maintained in the short term. Variable-rate mortgage holders would see no immediate change in their rates or payments, since prime would stay at 4.95% at major banks. Fixed mortgage rates also would likely stay around their current levels absent other market forces. A pause might already be expected by investors, so bond yields may not move dramatically on the news. However, the tone of the Bank’s communications will matter. If the Bank holds but sounds dovish (signaling concern about growth and hinting at future cuts), bond yields could drift lower, possibly pulling fixed mortgage rates down marginally over time. Conversely, if the hold comes with hawkish language (emphasizing inflation worries and downplaying near-term cuts), bond yields might hold steady or even tick up, which could put mild upward pressure on fixed rates. In general, though, a hold decision would mean mortgage rates remain roughly steady as we head into the summer. Lenders typically won’t adjust variable or fixed offerings significantly without a clear signal of rate direction.
• Rate Hike (Tightening): A rate increase on June 4 (for example, a surprise hike from 2.75% to 3.00%) would have the opposite effects. This is an unlikely scenario, but homeowners should understand the implications. Banks’ prime rates would rise in tandem with the BoC, so variable mortgage rates would increase by the same increment almost immediately. If you have a variable-rate mortgage, a 0.25% hike means you’ll be paying more interest each month; either your payments will increase (for adjustable-payment variables) or, if your payments are fixed, more of your payment will go toward interest rather than principal. Fixed mortgage rates could also be pushed upward, though not directly. A surprise hike might jolt market expectations – bond traders could start pricing in a more aggressive inflation-fighting stance, leading to higher bond yields. Five-year fixed mortgage rates, which reflect 5-year bond yields, might climb if investors believe further rate hikes are on the table. Essentially, a BoC hike would signal that borrowing costs could stay higher for longer, which tends to lift the longer-term rates that fixed mortgages are based on. The increase in fixed rates might not be immediate on the day of the announcement, but lenders could reprice their fixed offerings upward in the days/weeks following a surprise tightening. Overall, a rate hike would make borrowing more expensive across the board, a headwind for those with upcoming renewals. Again, this outcome is considered very low probability right now.

In summary, a rate cut would bring prompt relief to variable-rate borrowers and likely gently lower fixed rates over time; a hold keeps mortgage rates stable for now; and a hike would increase variable costs and risk pushing fixed rates up. Given our base-case expectation of a hold, mortgage rates may stay near current levels in the immediate term. But with potential cuts later in 2025, there is the possibility of variable rates and bond yields drifting downward as the year progresses. This dynamic leads into the final consideration: how should you strategize your mortgage renewal in this environment?

Strategic Advice for Mortgage Holders Renewing in 2025

Renewing a mortgage in 2025 means making important decisions amid economic uncertainty. Here are some strategic considerations for homeowners:

• Evaluate Fixed vs. Variable: The classic dilemma is whether to lock in a fixed rate or go with a variable rate that could move lower (or higher) over your new term. In the current climate, variable rates carry the promise of potential savings if the Bank of Canada cuts rates further to support the economy. Major forecasts (like TD Economics and others) predict the overnight rate could fall to around 2.25% by the end of the year, which would translate into roughly a 0.5% drop in variable mortgage rates. If you believe the economy will continue to struggle and the Bank will indeed cut rates in the coming months, a variable-rate mortgage or a shorter-term fixed (like a 1- to 3-year fixed) might allow you to benefit from those lower rates. However, you must also be comfortable with the risk that cuts could be delayed or that unforeseen events (e.g. a resurgence of inflation due to tariffs) could even send rates back up. A fixed-rate mortgage, on the other hand, offers certainty. Today’s 5-year fixed rates in the mid-4% range are well below the heights seen in 2023–24, and locking in now secures your payment against any future surprises. If your budget is tight and you can’t afford any increase in payments, opting for a fixed rate might be the prudent choice even if it means potentially missing out on savings from possible rate cuts. Essentially, consider your risk tolerance: if you can handle some fluctuation and are optimistic about rate cuts, leaning variable/short-term makes sense; if not, peace of mind with a longer fixed term can be worth it.
• Consider a Blended or Staggered Approach: You don’t necessarily have to go all-in on either fixed or variable. Some lenders offer the option to split your mortgage into part fixed and part variable. By diversifying in this way, you can hedge your bets – one portion of your loan is shielded if rates rise, while the other portion can benefit if rates fall. Another strategy if you have a large mortgage is to stagger your renewal terms (for instance, if you’re refinancing multiple components or if you have the flexibility to break into two loans), so that they don’t all come up for renewal at the same time. This can reduce the risk of renewing everything at a peak rate. While these strategies are more complex, they can be useful in an environment where the future rate path is uncertain.
• Shop Around and Negotiate: Mortgage renewal time is an opportunity to compare offers from different lenders. Don’t just accept your current bank’s posted renewal rate. With bond yields fluctuating and lenders adjusting their rates frequently, you might find a more competitive rate elsewhere. Even if the BoC holds rates steady in June, lenders have been known to cut fixed mortgage rates slightly to capture business as funding costs ease. It’s worth getting quotes from mortgage brokers or other banks – even a difference of a few tenths of a percent can save you thousands over the life of your mortgage. And remember, everything is negotiable. If you prefer to stay with your current lender, use a lower offer as leverage to ask for a rate match or discount. Lenders know customers are rate-sensitive, especially when budgets are stretched by years of prior rate hikes, so use that to your advantage.
• Think About Term Length: Given the expectation that rates could be on a gentle downward trajectory through 2025 and 2026, you may want to avoid locking in for too long at renewal. A 5-year fixed is the standard choice for many, but consider if a shorter term (say, a 2- or 3-year fixed) might align better with the current rate cycle. If rates are indeed lower a couple of years from now once inflation and the economy stabilize, a shorter term gives you the flexibility to renew into a lower rate sooner. On the flip side, if you’re more concerned about rates potentially rising (for example, in a scenario where the trade war ends and growth/inflation rebound), a 5-year fixed at today’s rate provides longer protection. There’s no one-size-fits-all answer – it depends on your outlook. However, many analysts currently anticipate a gradual decline in rates, not a return to pandemic-era lows but perhaps a settling in the 2–3% range for the overnight rate (which might translate to, say, 4% five-year fixed mortgages). Planning your term around that timeline can be wise.
• Budget for Safety: Regardless of which mortgage type you choose, build in some buffer in your budget. Interest rates, especially variable rates, can change direction quickly if conditions shift. Make sure you would be comfortable even if your rate ended up a percentage point higher than expected. With a variable mortgage, consider preemptively paying a bit extra on each payment (or keeping your payment at a higher level even if the rate drops) – this not only reduces your principal faster but also gives you a cushion if rates rise again. If you lock in a fixed rate, use the stability to your advantage by planning ahead: for example, you could set aside savings or make lump-sum prepayments (if allowed) to whittle down your balance during the term. The key is to remain financially flexible. The Bank of Canada’s own commentary acknowledges it is navigating “choppy waters”, so homeowners should do the same with their finances.

Conclusion: The June 4, 2025 rate decision comes at a critical juncture for Canada’s economy. While we expect the Bank of Canada to hold rates steady for now, the direction of policy through 2025 is likely toward gradual easing if inflation cooperates. For mortgage renewers, the primary message is to stay informed and be prepared. Keep an eye on inflation trends, economic updates, and the Bank’s statements in the coming months – these will guide where rates head next. In the meantime, focus on securing a mortgage strategy that you can live with under a range of outcomes. Whether that means locking in peace of mind or taking a calculated gamble on variable rates, make the choice that aligns with your financial situation and comfort level. By considering the scenarios and tips outlined above, you’ll be better equipped to navigate your 2025 mortgage renewal, whatever the Bank of Canada’s decision may be.