The Bank of Canada doesn’t set commercial mortgage rates directly, but its policy decisions ripple through the entire lending market.
Understanding that connection matters if you’re borrowing money for commercial or agricultural property. Let’s talk about what the Bank is doing, why they’re doing it, and what it means for real estate financing.
Where Monetary Policy Stands
The Bank of Canada’s policy interest rate is currently 3.25%. That’s down significantly from the peak of 5.0% in mid-2023, but it’s still well above the ultra-low rates we saw during the pandemic.
Governor Macklem and the Governing Council have signaled that they’re in a holding pattern. They’ve done a lot of rate cutting through 2024 and 2025. Now they’re watching to see how the economy responds.
The Bank’s mandate is clear: keep inflation around 2%, support maximum sustainable employment, and promote financial system stability. Right now, they’re managing trade-offs between those objectives.
Inflation has come down from the peaks of 2022-2023. We’re running around 2.4% to 2.7% depending on the measure you look at. That’s close to target, but not quite there. The Bank wants to see inflation settle convincingly at 2% before declaring victory.
Employment remains relatively strong. The unemployment rate has ticked up modestly but we’re not seeing mass layoffs or economic crisis. GDP growth has been positive, though not spectacular. Consumer spending is moderating but not collapsing.
In other words, the economy is doing roughly what the Bank wants it to do: cooling down without tipping into recession.
The Transmission Mechanism
Here’s how Bank of Canada policy affects commercial lending rates.
The overnight rate, which is the Bank’s policy tool, directly influences the prime rate that commercial banks charge. When the Bank cuts rates, prime rate comes down. When the Bank raises rates, prime goes up.
Variable rate mortgages, both residential and commercial, are typically priced as a spread over prime. So there’s a fairly direct connection between Bank of Canada policy and variable mortgage rates.
Fixed rate mortgages work differently. They’re based on bond yields, particularly Government of Canada bond yields for the relevant term. Those bond yields are influenced by Bank of Canada policy, but not controlled by it. Bond markets look ahead, pricing in expectations about where policy rates will be over the term of the bond.
This creates interesting situations where fixed mortgage rates can move before the Bank of Canada actually changes its policy rate, or where fixed rates don’t move much even when the Bank does cut or raise.
Right now, five-year Government of Canada bond yields are around 3.1% to 3.3%. That’s the baseline for five-year fixed rate commercial mortgages. Lenders then add their spread on top of that, which might be 200 to 350 basis points depending on the property, borrower, and loan structure.
Why Commercial Rates Haven’t Fallen More
The Bank of Canada has cut its policy rate by 175 basis points from the peak. But commercial mortgage rates have only come down about 80 to 100 basis points for most borrowers.
Where did the rest of the cut go?
Partly into lender margins. Banks and other lenders have increased their spreads over their cost of funds. They’re charging more for the perceived risk of commercial lending in this environment.
Partly into funding costs that haven’t fallen as much as the policy rate. While the overnight rate is down, the cost of longer-term wholesale funding hasn’t dropped proportionately. Banks raise money in capital markets, and those markets have been demanding higher returns.
And partly into credit tightening that shows up in pricing. When lenders reduce loan-to-value ratios or increase debt service coverage requirements, they can maintain higher rates because they’re offering less leverage.
This is frustrating for borrowers who expected rate cuts to translate directly into lower mortgage rates. But it’s the reality of how credit markets work in a period of economic uncertainty.
What the Bank Is Watching
If you want to anticipate where policy is headed, pay attention to what the Bank of Canada is focusing on.
Right now, their key concerns are:
Inflation persistence. Is inflation going to settle at 2%, or is it going to stay stubbornly higher? The Bank is particularly watching services inflation and wage growth. If workers keep getting 4% to 5% annual raises, that makes it hard to get overall inflation down to 2%.
Housing market dynamics. Housing is a huge part of the Canadian economy. The Bank wants to see a balanced housing market, not a crash, but also not a return to the unsustainable price growth of 2020-2021. Commercial real estate fits into this picture indirectly.
Consumer debt levels. Canadians are heavily indebted, particularly on mortgages. The Bank is very aware that raising rates causes pain for households, and they’re trying to avoid triggering widespread defaults.
U.S. economic conditions. Canada’s economy is deeply tied to the U.S. If the U.S. goes into recession, Canada likely follows. If the U.S. stays strong, that supports Canadian growth. The Bank is watching U.S. monetary policy and U.S. economic data closely.
Global financial conditions. What’s happening in global credit markets affects Canadian lenders’ funding costs and risk appetite. When global markets are calm, credit flows easily. When there’s turmoil, Canadian borrowers feel it.
The Case for More Cuts
Some economists argue the Bank should cut rates further and faster.
Their view is that inflation is already back to acceptable levels, the economy is showing signs of weakness in some sectors, and higher rates are doing unnecessary damage to employment and growth.
They point to mortgage renewals coming up over the next two years. Hundreds of thousands of Canadian homeowners will be renewing at higher rates than they’re currently paying. That’s going to reduce consumer spending and could trigger a recession if the Bank doesn’t provide relief through lower rates.
They also argue that the Bank’s policy rate is still restrictive when you adjust for inflation. Real interest rates (nominal rates minus inflation) are around 0.8% to 1.0% right now. Historically, real rates around zero are considered neutral, neither stimulating nor restraining the economy.
If the Bank wants to support growth, the argument goes, they should cut rates another 50 to 75 basis points this year.
The Case for Holding Steady
The counter-argument is that the Bank should be patient and keep rates where they are.
Inflation isn’t quite at target yet. Cutting rates prematurely could reignite price pressures, particularly in housing and services. Better to wait a few more months and make sure inflation is truly under control.
The economy isn’t in crisis. GDP growth is positive, unemployment is manageable, corporate profits are generally okay. There’s no urgent need for stimulus.
And cutting rates too much would risk creating new imbalances. Housing affordability is already a major political issue. Cutting rates would support housing prices, which might not be the outcome policymakers want.
Governor Macklem seems to be in this camp right now. The message from the Bank has been: we’ve done a lot of cutting, let’s see how it works.
What This Means for Borrowers in 2026
For commercial and agricultural borrowers, the practical implication is that the Bank of Canada probably isn’t coming to your rescue with dramatically lower rates in the near term.
We might see one more cut, maybe 25 basis points, in the first half of 2026. But betting on multiple cuts totaling 75 to 100 basis points seems optimistic based on current economic conditions.
That means commercial mortgage rates are likely to stay in roughly the current range for the next several months. Five-year fixed rates in the low-to-mid 5% range for strong borrowers, variable rates in the high 5% to low 6% range.
If the economy weakens significantly, if inflation drops notably below 2%, or if global financial conditions deteriorate, the Bank could cut more aggressively. But those aren’t the baseline scenarios right now.
The Variable vs. Fixed Decision
Bank of Canada policy uncertainty makes the fixed vs. variable rate decision challenging.
Variable rates are currently higher than fixed rates in many cases. That’s unusual, and it reflects the fact that bond markets are pricing in rate cuts that haven’t happened yet.
If the Bank does cut rates further over the next year or two, variable rate borrowers will benefit. But if the Bank holds steady or if credit spreads widen, variable rate borrowers could end up paying more than fixed rate borrowers.
My general view is this: if you can get a five-year fixed rate within the range of current variable rates, that’s worth considering for the certainty. If fixed rates are significantly higher than variable, and you can handle rate volatility, variable might make sense.
But don’t base your decision solely on Bank of Canada predictions. Those are hard to get right, and credit market factors matter as much as policy rates.
The Longer View
Looking past 2026 into 2027 and beyond, where are interest rates headed?
The Bank of Canada has talked about the neutral rate as being around 2.25% to 3.25%. That’s the policy rate that neither stimulates nor restrains the economy over the long term.
If the Bank eventually gets inflation to 2% and keeps it there, they’ll probably target a policy rate in that neutral range. Call it 2.75% as a midpoint.
That would be about 50 basis points below where we are now. Which suggests some modest downward drift in rates over the next couple of years, but not a return to the 1.5% to 2.0% policy rates we saw during the pandemic.
For commercial borrowers, that probably translates to five-year fixed rates settling in the 4.5% to 5.5% range over the next two to three years. Better than today, but not dramatically so.
What to Watch
If you’re tracking interest rates for financing decisions, here are the indicators to monitor:
Check the Bank of Canada’s policy announcements, which happen eight times per year. Read the Monetary Policy Report, which provides detailed analysis of the Bank’s thinking.
Watch Canadian CPI releases, which come out monthly. If inflation keeps declining, rate cuts become more likely.
Follow five-year Government of Canada bond yields. These move daily and give you a real-time sense of where fixed mortgage rates are likely headed.
Pay attention to credit spreads. If the difference between government bond yields and corporate bond yields is widening, that suggests lenders are getting more risk-averse, which means higher mortgage rates even if policy rates stay flat.
And watch U.S. data. The Federal Reserve’s policies matter for Canadian interest rates because of capital flows between the two countries.
Partner With Knowledgeable Brokers
Navigating the interest rate environment requires understanding how policy, markets, and lender behavior interact.
At Creek Road Financial Inc., we stay on top of these dynamics every day. We track where different lenders are pricing, how they’re responding to Bank of Canada policy changes, and what opportunities exist for commercial and agricultural borrowers.
Whether you’re timing a new financing, considering refinancing, or deciding between fixed and variable rates, we can help you make an informed decision based on current market conditions and your specific situation.
Let’s talk about your financing needs and how to position you for success in this rate environment.