What Drives the Bank of Canada’s Rate Decisions?

Brandon Forler
Sep 15
2 min read

When the Bank of Canada (BoC) adjusts the policy interest rate, it isn’t guessing—it’s responding to a set of measurable forces. Here’s the plain-English version of what really moves the needle, and what it means for Alberta homebuyers and investors.

1) Inflation and the 2% Target

The BoC’s primary job is price stability. It aims to keep inflation close to 2% (within a 1–3% band). If inflation is running hot—groceries, fuel, and services rising too fast—the BoC leans toward hiking rates. If inflation is cooling and the economy needs support, it leans toward cutting.

2) The Economy’s Speed: Growth, Jobs, and the “Output Gap”

Think of the economy as a car. If GDP growth and hiring are strong and the “engine” is revving above its sustainable speed, price pressures build—rate hikes become more likely. If growth slows, unemployment ticks up, and factories/offices have excess capacity, that points toward lower rates.

3) The Canadian Dollar and Global Forces

Canada is a trading nation. Shifts in oil and natural gas prices (big for Alberta), a stronger or weaker loonie, and moves by major central banks (like the U.S. Federal Reserve) can all influence the BoC. A sharply falling dollar can add to import-price inflation; global slowdowns can cool demand for Canadian exports—both feed into rate decisions.

4) Financial Stability: Debt, Housing, and Credit Conditions

The BoC also scans for risks in the financial system. Rapid home-price gains, stretched household debt, or very easy credit can amplify future instability. If credit conditions are already tight (harder to get loans, higher bond yields), the BoC may not need to raise rates as much—markets did some of the work.

5) Expectations and BoC Forecasts

What businesses and households expect to happen matters. If people expect high inflation to stick, they set prices and wages accordingly—making inflation harder to tame. The BoC studies surveys, market data, and its own forecasts to keep expectations anchored.

How This Hits Your Mortgage in Alberta

Variable-rate mortgages & lines of credit: Usually move shortly after BoC decisions via changes to prime rate.
Fixed-rate mortgages: Track Government of Canada bond yields more than the BoC’s rate. Bond markets react to the same forces above—especially inflation and growth—often before an announcement.
Local context: In Alberta, population inflows, energy prices, and new-home supply all shape housing demand. Those trends don’t set the BoC rate directly, but they influence inflation and growth, which the BoC watches closely.

Bottom line: The BoC adjusts rates to balance inflation and growth while safeguarding financial stability. If you’re planning a purchase, renewal, or refinance, the right strategy depends on how these forces are evolving—and your timeline and risk comfort.

Next steps: Book a free consultation, download my mortgage calculator app, or follow along on Instagram!