The Federal Reserve raised its target range to 3.75 to 4.00% on September 16, the first increase in the federal funds rate since 2023. Two weeks earlier, on September 2, the Bank of Canada held its policy rate at 2.25% for the seventh straight scheduled announcement. The two central banks that Canadian advisors track most closely are no longer moving in the same direction, and the reason traces back to how each economy is absorbing the same oil price shock differently.
Both central banks are responding to the same underlying event: the ongoing Iran conflict and Strait of Hormuz disruption, which has pushed crude prices sharply higher since the spring and kept them elevated through September. The mechanism each bank is watching, and the conclusion each has drawn from it, is where the two paths separate.
What the Fed Saw That Made It Move
The Federal Reserve cut rates through late 2025, taking the target range from 4.25 to 4.50% down to 3.50 to 3.75% by December, then held there through the first half of 2026. The September 16 hike back to 3.75 to 4.00% reversed that trajectory on the view that energy driven inflation is broadening rather than staying contained to the gasoline pump, a risk the Federal Reserve judged worth addressing directly rather than waiting out.
The Bank of Canada is reading a materially different picture from what looks, on the surface, like the same input. Canadian headline inflation held at 3.0% in August, matching July and consensus forecasts. But the core measures the Bank of Canada prefers, CPI-trim and CPI-median, averaged closer to 2.0%, in line with target. Gasoline alone explains most of the gap: pump prices rose 22.8% year over year in August, down from the 25.7% increase in July, and stripping gasoline out of the calculation drops headline inflation to 2.4%.
The rate step chart below traces both banks since the start of 2025, and the point where the two lines stop moving together in the same direction is not a rounding difference. It is a genuine policy divergence: the Bank of Canada judging its inflation pressure as narrowly concentrated in energy while a slower growth path from tariffs argues against tightening, and the Federal Reserve judging the same broad category of pressure as reason enough to reverse course.
Both banks cut through 2025 before the paths split: the Bank of Canada has held at 2.25% since October 2025, while the Federal Reserve resumed tightening on September 16, 2026. Source: Bank of Canada; Federal Reserve.
The Transmission to Canadian Households
A held Bank of Canada rate against a hiking Federal Reserve has a direct transmission channel through the currency and through Government of Canada bond yields, which move partly in sympathy with U.S. Treasury yields regardless of what the Bank of Canada is doing domestically. A widening rate gap tends to pressure the Canadian dollar, and a weaker dollar feeds back into the same gasoline and imported goods costs that are already driving the headline versus core inflation split described above.
For a mortgage holder facing renewal, the near-term signal from this divergence is a Bank of Canada that has explicitly chosen not to follow a hiking Federal Reserve, which keeps the domestic five-year and other shorter tenors anchored closer to the 2.25% policy rate than to the U.S. path. That is the opposite of the pressure Canadian borrowers experienced in the 2022 to 2023 tightening cycle, when the two central banks moved together.