A policy rate that does not move for a year stops being a number and becomes a landmark. The Bank of Canada held its overnight rate at 2.25% for seven consecutive decisions before raising it 25 basis points to 2.50% on October 28, its first increase since July 2023.
That landmark has a name in the research. Tversky and Kahneman showed in their 1974 paper in Science that people estimate by starting from a reference value and adjusting too little, a pattern they called anchoring. A year of unchanged rates supplied exactly that kind of reference value to every borrower, saver and portfolio holder in the country.
The Anchor Is 2.25%, and the Adjustment Is Too Small
Anchoring predicts that a 25 basis point move will be read as small, whatever the central bank says about direction. The Bank of Canada said in its October statement that there could be a need to increase the policy rate further, and its Monetary Policy Report projects CPI inflation averaging 3% in 2027 before returning to 2% in the middle of 2028. A reader still anchored on 2.25% hears a pause with a footnote. The Bank of Canada is describing a path.
The anchor also bends the inflation debate. Canadian consumer prices rose 3.1% in September from a year earlier, but the Bank of Canada put inflation excluding gasoline at 2.2%, and Statistics Canada data showed CPI-trim at 1.8% and CPI-median at 1.9%. Someone anchored on the energy headline sees a bank fighting 3%. Someone anchored on core sees a bank raising rates into 2%.
The Bank of Canada explained that it moved to keep high energy prices from spreading into the prices of other goods and services.
Status Quo Bias Made the Pause Feel Permanent
Samuelson and Zeckhauser documented in 1988 that decision makers disproportionately stay with the current state of affairs, even when the alternatives have changed. Seven straight holds are a long run of reinforcement for that tendency. The rate had stood at 2.25% since the October 29, 2025 decision, so most borrowers made every financial plan of the past year against a policy rate that never moved.
The mortgage market shows how the status quo hid movement that was already underway. Fixed mortgage rates follow Government of Canada bond yields, not the overnight rate, and the five-year yield reached a 52-week high of 3.729% on September 28, according to money.ca. CIBC raised its five-year fixed rates by 20 basis points on October 9, according to Canadian Mortgage Trends.
The lowest variable rates, which do follow the Bank of Canada, move from 3.45% to 3.70%, according to Ratehub. Fixed borrowers absorbed their increase in September and early October. Variable borrowers absorb theirs now.
Loss Aversion Waits for the Payment, Not the Announcement
Kahneman and Tversky reported in their 1979 prospect theory paper that losses weigh more heavily than equivalent gains. The research implies that the emotional response to a hike arrives when a dollar figure does, on a lender statement or a renewal letter, rather than on the day of the announcement. Equity holders priced the hike on the day. The S&P/TSX Composite rose 94 points, or 0.3%, to 36,265 on October 28, and closed October 29 at 36,249.03 after a 16.06 point decline.
The S&P/TSX Composite finished October to date 2.9% above its September 30 close of 35,235.87, and the October 28 hike produced a 0.3% gain rather than a selloff.
Daily closes through October 28 are from YCharts, and the October 29 close is from the Canadian Press market report. The September CPI release was Monday, October 19, and the Bank of Canada decision was Wednesday, October 28.
The Canadian dollar traded at 71.51 cents US and December crude traded at US$102.00 per barrel on October 29, according to The Canadian Press, so the conditions behind the hike were fully visible to equity investors. The behavioural gap sits between a portfolio, where the hike was absorbed within a session, and a household budget, where it has barely begun to register.
Anchors Do Not Dissolve on a Single Data Point
Tversky and Kahneman also reported that payoffs for accuracy did not remove the anchoring effect, which is why a second move on December 9 would meet the same resistance as the first. The Federal Reserve held at 3.75% to 4.00% on October 28 in a 10 to 2 vote, with both dissenters favouring a hike, so the reference value is moving on both sides of the border.