Bank of Canada lifts policy rate 25 bps to 2.5% for first time in over three years

The Story

The Bank of Canada raised its benchmark interest rate for the first time in more than three years on Wednesday, increasing its policy rate by 0.25 percentage points to 2.5%. The central bank’s policy rate influences the cost of borrowing for banks, businesses and consumers, with the change expected to raise borrowing costs while potentially improving returns for savers.

For homeowners with variable-rate mortgages, personal certified financial officer Ryan Gubic said they will likely receive notices in the next 24 to 48 hours indicating their rates are going to increase. He said that for borrowers with variable mortgages but fixed payments, more of each monthly payment would go toward interest rather than principal.

Homeowners with fixed-rate mortgages will not see an immediate change to their interest rate, but Kelly Ho, a Vancouver-based certified financial planner, said it remains important to monitor rate movements. She added that for Canadians renewing in the next year or two, it’s important to understand what the new renewal rate would mean for payments, and that potential borrowers may need to revisit their budgets to see if higher rates can be absorbed.

Interest rates on personal lines of credit and home equity lines of credit typically track changes to the central bank’s prime rate. Natasha Macmillan, senior director of everyday banking at Ratehub.ca, said lenders usually adjust prime rates when the Bank of Canada moves its benchmark rate, and that adjustment flows through to variable-rate loans and lines of credit. Macmillan recommended checking the rate being charged on the outstanding balance and keeping payments up to date.

For home equity lines of credit, Gubic said the interest rate is typically variable plus an additional spread charged by the bank or financial institution. He also noted that while auto loans with variable rates may be affected, Macmillan said car loans typically have fixed rates.

Macmillan said savers can benefit as interest rates rise, including earning more on high-interest savings accounts and on investments such as GICs. She cautioned, however, that banks can be slow to raise savings-account rates after a central bank hike and that it can take up to two weeks for new rates to appear.

On markets, Gubic said higher central bank rates can put downward pressure on stock valuations by increasing borrowing costs and potentially reducing profitability. He added that investors also discount future earnings potential at higher rates, which can weigh on company stock prices, though he said markets often adjust by pricing expectations for economic factors like interest-rate moves ahead of time.

Gubic said consumers should review their debt—including mortgages, lines of credit and car loans—when interest rates change, paying particular attention to any variable-rate accounts. He also said borrowers with fixed-term loans should check when their next rate renewal occurs, while savers should look to confirm whether they are receiving a competitive return or could switch to an account with a higher rate. Finally, Gubic said investors should revisit their portfolios to ensure they still match long-term goals and risks, adding that making portfolio changes based on a single interest-rate announcement is a mistake and that investors should review decisions holistically.