The BoC Hikes, the Fed Pauses: Fixed Rates Have Steadied, and U.S. Bond Markets and the Exchange Rate Now Hold the Key

Published Thursday, October 29, 2026 · Rates, market figures and outlooks in this article reflect its publication date and may differ today. Ask us for the latest picture. Translated from the Korean original.

Yesterday (October 28), the Bank of Canada (BoC) raised its policy rate from 2.25% to 2.50%, its first increase since July 2023, while on the same day the U.S. Federal Reserve (Fed) held its policy rate at 3.75–4.00%. Since a 0.25 percentage point increase in interest costs for variable-rate borrowers was already well signalled, this issue focuses on where fixed rates, which have recently caught their breath, are likely to head next, looking at bond markets and the exchange rate.

Key Points

• The BoC hike aims to stop energy-driven inflation from spreading: September inflation excluding gasoline was a stable 2.2%, but with high oil prices persisting, the Bank expects inflation to rise to around 3.5% by year-end. It also raised its 2027 average inflation forecast by 1 percentage point to 3%. It left the door open to further hikes but signalled a measured pace, saying it would "proceed carefully."
• An already-priced-in hike and a calm market: Because the market had largely expected the hike, Canada's 2-year bond yield rose only slightly right after the decision, and the Canadian dollar barely moved. The 5-year bond yield has come down from its 52-week high on September 28 (about 3.73%) and is trading at around 3.6%.
• A Fed hold, but a "hawkish hold": The Fed held in a 10–2 vote, and both dissenters favoured a hike. The statement actually upgraded its assessment of the economy, and markets are pricing in about an 86% probability of a December hike. The U.S. 10-year Treasury yield rose to 5.05% on the day of the hold, back above 5%.
• A narrower rate gap and a rebound in the loonie: As the gap between the Fed's and the BoC's policy rates narrowed to 1.25 percentage points, the Canadian dollar rebounded slightly against the U.S. dollar after the Fed hold, moving below 1.40 (about 72 cents).

What It Means

Canadian fixed rates follow the Government of Canada 5-year bond yield, not the BoC policy rate, and that 5-year yield is heavily influenced by U.S. Treasury yields. Since this BoC hike was already priced into the market, there is little to push fixed rates higher right away, and in the short term they look likely to move up and down around today's steadier levels. Still, it is hard to bet on them falling. With the U.S. 10-year yield staying above 5% and a December Fed hike largely priced in, the Canadian 5-year yield can be pushed higher whenever U.S. bond markets wobble. The exchange rate points the same way. When the Canadian dollar weakens, import prices rise, adding to pressure on the BoC to hike further, which in turn supports bond yields. It is positive that the loonie got some breathing room from the narrower rate gap, but if the Fed hikes again in December, that effect could quickly reverse. In the end, the direction of fixed rates depends on the December 9 BoC meeting, the Fed's December decision, and whether the U.S. 10-year yield stays above 5%. If you have a renewal or home purchase coming up, rather than reading today's stability as a sign that rates will fall, a realistic approach is to use this relatively quiet window to secure a rate hold starting 4–6 months before your renewal date.