What the policy rate actually is
The Bank of Canada sets one number: the overnight rate, which is what banks charge each other to borrow for a day. Everything else follows from it. Variable-rate mortgages move with it almost immediately. Fixed-rate mortgages move with bond yields, which move with what investors expect the Bank to do next. Savings account rates move with it slowly and grudgingly.
The Bank has one official target, inflation at two percent, and it uses the rate to get there. Raise the rate and borrowing gets expensive, people spend less, prices rise more slowly. Cut it and the reverse. It is a blunt tool. It cannot make groceries cheaper or build houses. It can only make people spend less or more.
Why the Bank is stuck
Inflation is close to target, which argues for leaving rates alone. The economy is weak, with unemployment above where it was before the pandemic and growth barely positive, which argues for cutting. And the tariff situation with the United States argues for both at once: tariffs push prices up, which is inflationary, and push exports down, which is a drag on growth.
That is why the Bank's statements in 2026 have read like someone hedging. Governor Tiff Macklem has said the Bank cannot offset the effects of a trade war with rate cuts, only cushion them. The honest translation is that the tool does not fit the problem, so the Bank is moving slowly and waiting for the data.
The renewal wall
Here is the part that matters at a kitchen table in Richmond Hill. Most Canadian mortgages are five-year terms. A family that bought or refinanced in 2020 or 2021 locked in a rate near two percent. Their renewal in 2025 or 2026 comes at something closer to four. On a 600,000 dollar mortgage that is roughly 500 to 600 dollars more per month, before property taxes and insurance, which also went up.
The Bank estimated that a large majority of mortgages outstanding in 2024 would renew by the end of 2026, most at higher rates. That is a slow squeeze on household spending, and it is one reason retail sales and restaurant spending in Ontario have been soft even with rates falling. The cuts help. They do not undo the round trip.
What to expect
My read: the policy rate stays in the mid-twos for most of 2026 unless the trade situation gets a lot worse, in which case the Bank cuts toward two and accepts a little more inflation. Fixed mortgage rates depend on bond markets, which depend on the United States as much as on Ottawa, so they may not fall as much as people hope.
If you are renewing this year, the choice between fixed and variable is closer than it has been in a while. If you are a student trying to understand this, the thing to remember is that the rate is the Bank's answer to inflation, and inflation right now is being pushed around by a trade dispute the Bank did not start and cannot end.