The Bank of Canada held its policy rate at 2.25 percent on September 2, the seventh straight decision without a change since the October 2025 cut. Two weeks later, the Federal Reserve raised its target range by 25 basis points to 3.75 to 4.00 percent, its first increase since 2023. The two decisions, read together, say more about where each economy stands than either says alone.
Both central banks cut in the same week in October 2025, the Bank of Canada to 2.25 percent and the Fed to 4.00 percent at the upper bound, narrowing the gap between them to 175 basis points at that point and further to 150 basis points by December as the Fed kept cutting while the Bank of Canada held. The September Fed increase reopened that gap to 175 basis points, undoing nine months of convergence in a single decision.
Why the Bank of Canada Cannot Follow
Canadian inflation sat at 3.0 percent in August, unchanged from July, with core measures closer to 2.2 percent and gasoline prices doing most of the work above target. Governing Council members have been explicit that new US tariffs and the Canadian counter-measures that followed the breakdown of trade talks pose risks to the recovery on their own, without an added rate increase to manage. Second quarter GDP grew 3.3 percent on a broad-based rebound, but unemployment held at 6.4 percent in July, with labour demand still described by the Bank as subdued.
The rate gap between the two central banks has moved in a narrow band for two years, and the current widening puts it back at the upper end of that range rather than into new territory.
The gap reflects each central bank's own domestic mandate rather than coordination between them. The Bank of Canada last cut in October 2025 and has held at 2.25 percent since, while the Federal Reserve cut through December 2025 before reversing course in September 2026.
What the Widening Gap Means for the Five-Year
A wider gap pulls capital toward US dollar assets and adds pressure on the Canadian dollar, which traded near a six-week low against the US dollar after the Fed decision. The Bank of Canada does not target the currency directly, but a weaker loonie raises the cost of imported goods, feeding back into the same inflation the Bank is already watching. For the mortgage renewal wall building through 2026 and 2027, the more direct link runs through the five-year Government of Canada bond yield, which sets fixed mortgage pricing and responds to US Treasury yields as much as to anything the Bank of Canada does domestically.
None of this commits the Bank of Canada to a rate increase of its own. It does mean the easy assumption, that a steady Canadian policy rate implies a steady borrowing environment, no longer holds while the Fed is moving and Canada is not.