The Rate Cycle’s Long Shadow

Where We Are in the Cycle

The Bank of Canada delivered ten consecutive rate increases between March 2022 and July 2023, pushing the overnight rate from 0.25% to 5.00% — the highest level in over two decades. The lag effects of monetary tightening are famously long and variable, and Canada is living through exactly that delay.

Mortgage renewals remain the single biggest transmission channel. Roughly 2.2 million fixed-rate mortgages are set to renew by end-2026, many originally taken out at sub-2% rates. The payment shock for these households — often 30–50% higher monthly obligations — is only beginning to hit balance sheets.

Business Investment: The Quiet Contraction

Higher rates have made the hurdle rate for capital projects steeper. Non-residential investment outside the energy sector has been tepid. Small and medium enterprises that financed equipment or inventory through floating-rate credit lines have seen their interest costs double or treble. The result: deferred hiring, reduced inventory builds, and a cautious posture toward expansion.

When Does the Shadow Lift?

The Bank began cutting in June 2024. But the path back to neutral — estimated at around 2.5–3.0% — is gradual. Inflation in services remains sticky, core measures stubbornly above target, and the labour market has not deteriorated enough to give policymakers confidence that inflationary pressures are fully extinguished. The shadow of the rate cycle will stretch well into 2026.