Here’s what to look out for to see which way interest rates are headed

With Interest rates on the rise for most of 2022 and 2023, variable and adjustable rate mortgage holders are feeling the heat, and so is the economy. The Bank of Canada has a stated goal “to promote the economic and financial welfare of Canada.” and “to regulate credit and currency in the best interests of the economic life of the nation.” This means the Bank of Canada won’t just raise interest rates forever as they know that both borrowers and the economy could suffer as a result.

At the time of writing, annual inflation (measured by the CPI) is still above the Bank of Canada’s common target of 2%, but is now far less than its peak of 9.1% in June of 2022. If you’re a variable rate mortgage holder, or planning to take on a mortgage in the future, here are 5 factors that we can look at to see when the Bank of Canada is likely to start lowering rates again.

Key Takeaways

  • The Bank of Canada has been rapidly raising interest rates to combat inflation
  • Inflation has slowed considerably since it’s peak in 2022 leading to the Bank of Canada pausing rate hikes for the time being
  • Check out our latest interest rate forecast to see which way rates are headed

1. Inflation

The main goal of the Bank of Canada at the moment is to curb inflation which has been causing the cost of living to skyrocket in the past few years since the start of the pandemic. While the exact causes of inflation are debated, high levels of spending in the economy play a large role, and a cheap cost of borrowing increases demand for goods and services. The Bank of Canada has been raising interest rates in an effort to reduce inflation and has largely been successful in that goal. Inflation has dropped from a high of 9.1% in 2022, down to around 3% as of July 2023. If CPI begins to trend around 2% it’s unlikely the Bank of Canada will continue to raise rates.

2. Economic output (GDP)

While curbing inflation remains the current main focus of the central bank, they are also responsible for promoting the wellbeing of the economy, ensuring that GDP does not fall for lengthy periods. A decrease in the output of the economy (GDP) means businesses do worse, which means people lose their jobs, which means people struggle to pay the cost of living and don’t have money to spend, which means businesses do worse, and so on in a recessive loop. A prolonged decrease in GDP is referred to as a recession, and it’s bad for a number of reasons, not least of which because it means people lose their jobs and struggle to pay their bills. The Bank of Canada wants to keep inflation under or close to 2%, but if interest rates go too high too fast it’s likely that the reduction in demand will lead to a recession. This means that the Bank of Canada plays a careful balancing act between managing inflation and the economy. If their judgment was off by some margin and the economy heads into a recession, it’s likely that the Bank of Canada will start lowering rates to spur demand and boost the economy.

Today's best mortgage rates:

5-year variable: 5.95%
5-year fixed: 5.54%

Get pre-approved today →

3. The job market 

Another indicator of the strength of the economy is the job market. The Bank of Canada looks at the unemployment rate to see if their interest rate policy is having the right impact on the economy. If employment remains high then it seems that businesses are still able to spend money at a rate that is conducive to inflation. On the other hand, while they look in the short term to a reduction in employment as a sign that inflation is slowing, they don’t want to cause mass unemployment in the market. If unemployment is on the rise that could be a sign that the Bank of Canada may be close to stopping rate hikes and potentially reversing their monetary policy.

4. The U.S.

While we don’t share a central bank with our neighbor to the south, there’s no doubt that the Bank of Canada takes into account how the central bank of the United States is acting. The U.S. has also been dealing with high levels of inflation and the Federal Reserve have been raising rates at the same time as the Bank of Canada. If either the U.S. or Canada were to stop raising rates while the other continued, their currency would lose comparative value. If interest rates are higher in the U.S. then it’s cheaper to borrow Canadian dollars which devalues our currency. As a result, the Bank of Canada pays close attention to how the Federal Reserve are managing their monetary policy, and it’s likely that when the U.S. starts to decrease interest rates we’ll follow suit.

5. Mortgage rates

While the mortgage market could arguably be considered a lagging indicator of which way interest rates are trending, current interest rates give us valuable insight into which way lenders think that rates are likely to trend. If variable mortgage rates are higher than fixed rates, then lenders believe that it’s more likely that rates will trend downwards so you pay a premium for a variable rate which is likely to go down. On the other hand if fixed rates are higher then it’s predicted that mortgage rates are likely to increase, and so you’re paying a premium to secure fixed payments while rates are low. 


To get a good idea of which way interest rates are headed check out our latest interest rate forecast.

Perch is your digital mortgage brokerage, offering you the opportunity to search and compare mortgages, then get pre-approved in as little as 20 minutes. Think of us as Google Flights, but for your mortgage.

When you sign-up to Perch you get instant access to our Pathfinder tool, which will show you mortgage options from dozens of lenders.

Our mortgage advisors have years of experience in the mortgage industry, and can help you choose the best mortgage for your situation, so you don’t have to worry about leaving money on the table.

Compare thousands of mortgage offers in less than a minute

Find my mortgage