Interest-rate realism
After two years of aggressive tightening, the Bank of Canada has entered a “higher-for-longer” phase. The overnight rate remains at 4.5 %, while five-year mortgage rates hover near 5.7 %. Real borrowing costs are the highest in 15 years.
| Metric | 2019 | 2023 | 2025 (Q3 est.) | Source |
|---|---|---|---|---|
| BoC Overnight Rate | 1.75 % | 5.0 % | 4.5 % | Bank of Canada |
| Inflation (CPI y/y) | 1.9 % | 3.4 % | 2.8 % | StatsCan 18-10-0004 |
| Business Loan Growth (y/y) | +6.2 % | +1.8 % | +1.5 % | OSFI Banking Data |
Implications for business
Capital costs remain high even as inflation cools. Firms reliant on debt-funded growth face margin compression and valuation downgrades. The cost of refinancing commercial paper has doubled since 2021.
What leaders can do
- Stress-test at 6 % rates. Assume prolonged tightness through 2026.
- Prioritize ROIC over expansion. Redeploy capital to projects exceeding cost of capital by 3 points.
- Lock in long-term debt early. The curve will flatten but not fall sharply.
- Build liquidity buffers. Target 120 days cash coverage minimum.
Arcus Insight: A higher-for-longer cycle punishes impatience. Firms that master cost of capital discipline will define the next expansion.