Dan Eisner, True North Founder and CEO, speculates on current market conditions and where rates may be headed.
Will interest rates go down in 2025? With both trade and inflation turmoil afoot, the BoC is like a cat on a hot tin roof — will it cut or pause rates? Here's what I see.
Tariffs are now a reality on both sides of the border. This blog focuses on watching the factors and reading the numbers for real-time insights and where rates are forecast to go.
For deeper insight into how and why trade disruption could impact mortgage rates, including updates on U.S. and Canadian tariff dates, read our companion blog: How Trump's Tariffs Could Impact Mortgage Rates in 2025.
As the founder and CEO of True North. I'm always asked about interest rates. That makes perfect sense as we've built True North Mortgage to offer the lowest mortgage rates around — with a simple, fast, client-focused service. Many of our competitors have tried to copy us ever since.
The Bank of Canada started a monetary easing cycle in June 2024 after its rate hit 5.0% (a 23-year ceiling). Since then, interest rates have reduced by 2.0%.
Hang on to your tarot cards — a trade war has begun between the U.S. and Canada. Where will the economy and interest rates go from here?
On January 29, 2025, the Bank of Canada cut its policy rate by 0.25%, bringing its rate to 3.0% and most bank prime rates to 5.20%.
Stay tuned for the next rate decision on March 12, 2025. Get timely updates — sign up for our newsletter.
"As we consider our monetary policy response, we will need to carefully assess the downward pressure on inflation from the weakness of the economy, and weigh that against the upward pressure on inflation from higher input prices and supply chain disruptions."
– Referencing potential broad trade disruption, BoC Govenor Tiff Macklem remarks on January 12, 2025 rate announcement
Markets immediately reacted to Trump's 25% tariffs on most Canadian goods imported to the U.S. (10% on our energy products) and Canada's reciprocal tariffs.
With continuing trade turmoil, an economic hit is both likely and expected, whether full U.S. tariffs remain or are pulled back on certain Canadian goods — though a mix of inflationary pressures will still challenge the central bank, as its sole mandate is to tame inflation.
For the impending March rate announcement, the BoC will likely post a 0.25% cut in an attempt to get ahead of the impact on Canadian economic growth, which had started to look rosier coming into 2025.
Sudden U.S. tariffs imposed on Canadian imports, along with Canadian retaliation on U.S. imports, could bring a different kind of inflation. Demand-pull inflation is what we're used to, which the BoC fights to bring down with higher interest rates.
However, higher prices that are passed onto consumers due to 'artificially' higher input costs for businesses (such as from tariffs paid to the 'imposing' government) are seen as push-cost inflation. Raising interest rates against this type of inflation dilemma could lead to deeper economic damage, risking stagflation.
The BoC's policy rate isn't yet 'neutral' enough to set economic growth at a consistent hum. The BoC would have pushed out a couple more rate drops of 0.25% during the first half of 2025 — with underlying inflation occasionally knocking at the 'rate pause' door.
That would have brought its policy rate to 2.50% — for a total prime rate drop of 2.5% by the end of 2025.
Considering 2024's economic growth was just revised to a healthier number than expected (which could keep the BoC from cutting rates that low), all bets are now off amid a trade war.
Whether it's the threat of U.S. tariffs, a full-blown trade war, or higher tariffs on certain Canadian goods, the impact on our economy is already evident.
Economists predict that (with an eye on potential price volatility) the BoC might have to cut its rate another 3 to 6 times (0.25% drops) to a policy rate of at least 2.25% — for a prime rate of least 4.45%, assuming the current spread with the policy rate of +2.20%.
A tariff-induced recession would see cuts coming faster and deeper.
The central bank will need to consider rate pauses with inflationary headwinds blowing through its hair, asserting its inflationary-fighting position for markets (and Canadians) to understand it hasn't lost sight of that importance.
Note here that bond yields, which inform fixed rates, will be pushed and pulled by a mix of forces, but look for a dedicated downward trend if more than two interest rate cuts are anticipated.
Be aware that everything is uncertain right now. Stay with us as we seek some level of certainty for how this new reality will progress for Canadians.
Read here for more on why trade tariffs could affect mortgage rates this year, including how tariffs have worked out for everyone in the past.
The BoC had indicated that its neutral rate (assuming no tariffs) currently sits at around 2.75%, where the economy is neither stimulated nor repressed. However, rates might need to go lower to stimulate an economy dragged down by trade turmoil.
There's always that danger, although the economic (and tariff threat) softening already underway makes it unlikely. The crystal ball is in the air regarding how this year's economy will fare.
As interest rates change, fixed mortgage rates usually move in anticipation of the changes, but more fluctuation is possible between interest rate announcements. That's because fixed rates follow the bond market. Read more here.
"Keep in mind that predicting interest rates is a 50/50 game, but if we don't attempt to forecast, we can't help prepare or protect our mortgage clients."
Cooling numbers all around will keep the Bank of Canada on its current rate-cutting course:
What happens if too many factors are showing heat? Then, we start looking for the BoC to pause rate cuts.
Did you know? CPI (Consumer Price Index) measures the monthly change in prices (from a fixed basket of goods and services) paid by Canadian consumers. It's the most widely used measure of inflation. See 2024 CPI readings here.
Headline inflation in January rose to 1.9% (from December's 1.8%). Which seems fine, still below the 2.0% target. However, this reading is skewed by the federal government's 'G.S.T. Holiday' (which ended February 15) that reduced certain price components. Ignore the tax benefit, and inflation rose at a pace of 2.7%.
The core inflation average also rose to 2.7%. Market oversupply is still the name of the game, but rate divergence with the U.S., a lower CDN dollar, and increasing U.S. inflation are pushing back.
The January unemployment rate declined to 6.6% (from 6.7%), surprising analysts with a jobs gain of 76K jobs (25K had been expected), led by the manufacturing sector. Wage inflation also dropped further to 3.8% (from 4.1% last month) — notching the slowest monthly increase since April 2022.
There is still plenty of slack left in our labour market, but a downward trend in the unemployment rate adds potential for increasing inflation that could make the BoC ponder a rate pause.
December and Q4 2024 GDP grew by more than expected, thanks to fired-up consumer spending in the last half of the year, partly spurred on by the G.S.T. holiday.
Canadian GDP (Gross Domestic Product) set a Q4 annualized pace of 2.6% (real GDP Q4 growth was 0.6%, quarter-over-quarter). Annualized means quarterly growth compounded by a formula to assume the same pace for 4 quarters, offering a 'yearly' growth rate for comparison. Real GDP annual growth for 2024 is thought to be about 1.5% (year-over-year), higher than the BoC projection of 1.3%.
That pace isn't half bad, considering the grim projections of crawling vs. walking for 2024. But will it continue?
Not likely now, with U.S. President Trump throwing a hurricane of blanket tariffs into our path — current 2025 GDP forecasts will have a hard time standing up against those headwinds.
Is an economic breakaway possible? If provinces can agree to remove most inter-provincial trade barriers, the positive GDP bump could help buffer tariff turbulence.
National average home sales logged a decline in January 2025 even though new inventory rose by 11%; major city centres reported a substantial sales decline from January to February in response to tariff threats; home prices remained relatively stable.
Will lowering interest rates (and new mortgage rules that favour younger buyers) encourage some buyers out this spring despite the trade-induced economic turmoil? Perhaps not, if financial concerns override the spring feeling of looking for a new home.
Like it or not — our countries' economies are closely linked, including the impact of the two rate agendas on the Canadian dollar.
With a Trump presidency, here are some current concerns:
As you can see, it's not just blanket U.S. tariffs that can affect our economy and the BoC's rate decisions.
Here's a look at the inflation rate over the past year — which has cooled to the Bank of Canada's target of 2.0% from a high of 8.1% reached in June 2022.
Total CPI (Consumer Price Index) is represented as an annual inflation rate (headline inflation), which appears in the media the most. It reflects the year-over-year price change percentage for a weighted basket of goods (including volatile ones, like gas and food).
Core inflation is closely monitored by the BoC. We show the average of trim and median, which strip out extreme price volatility to get to the 'core' of price movements.
CPIX excludes the most volatile price components and strips any effect of indirect tax changes on what's left (hence the X). The BoC stopped using this measure in 2016, though many experts still use it to gauge the 'bare' impact of price changes.
Fixed mortgage rates are steered by the Canadian bond market and (eventually) follow the movements in bond yields up or down. 5-year bond yields are the standard for setting 5-year fixed rates and are the reference in this section and blog.
Canada's 5-year bond yields are hovering around 2.6% following U.S. trade tariffs of 25% on most Canadian goods and 10% on Canadian energy (gas, oil, and electricity).
Inflationary pressures are ramping up on both sides of the Canadian border, which will still keep pressure on Canadian bond yields and the BoC for its next rate decisions, pushing against the need to cut to support the economy through trade disruption turmoil.
For now, expect lender specials to pop up or disappear quickly on specific term rates depending on yield movements. Lenders are closely monitoring their costs and retaining capital to address the potential for increasing debt arrears.
Current fixed rates had already largely factored in another two BoC prime rate cuts. But new future uncertainty may see them drop (still with the potential for rollercoaster increases) as markets grapple with the repercussions. Short-term inflation concerns may yet show up in yields, which could push 5-year fixed rates up and down by around 0.15% over the first quarter of 2025.
If it seems abundantly apparent that the economy needs rate cuts regardless of rising inflation, fixed rates could decline further than originally thought (it's too soon to call a potential drop amount).
Currently, variable rates (which float with changes to bank prime rates) still have more room for decline than fixed rates. The 5-year variable mortgage rate will eventually move lower than the stalwart 5-year rate, which is the 'normal' state of rate affairs — typically lower by a spread of about 0.25% to 1.0% because of the increased risk of change.
Fixed Mortgage Rate Watch: You can watch the fluctuations in 5-year bond yields in reaction to the latest economic news. For the most part, yields try to anticipate the inevitable: a soft landing or hard thud that will signal an about-face in the BoC's rate agenda.
The U.S. economic landscape was looking pretty strong (along with rising inflation), but recent reports (before tariffs were enacted) showed underlying cracks, with fewer job postings and reduced consumer spending.
The fresh U.S. President Trump/billionaire Elon Musk administration has thrown substantial uncertainty into how both economies will fare as 2025 is certain to become a year to remember (or forget).
Why do we care? Economic conditions south of the border can influence factors weighed by our central bank (and drive higher prices or economic detraction here) to affect its rate decisions.
Despite the constant, distant calls of the 'recession' loon, it hasn't yet flown into our backyard. Though trade disruption is likely to now beckon a hasty landing.
With the high interest rate environment so quickly imposed on Canadians to tame high inflation, a mild recession had been expected through the first half of 2024, which did not materialize. And until Trump took office, growth projections were starting to look up for 2025.
Will market resilience keep our economy out of recessionary territory? Some experts expect a recessionary shock from the trade war. In time, it's hoped that Canadian businesses will adapt.
Canadian initiatives are already underway in an attempt to head off an economic blow — such as reducing inter-provincial trade barriers, reviewing restrictive government regulations that choke our productivity, and unfurling more international trade opportunities.
Before the trade disruption, our labour market and economic growth were showing signs of strength, yet household budgets are still straining under the higher prices all around.
If economic weakening accelerates, the BoC would likely drop prime rates faster (assuming that job losses would occur to help place downward pressure on inflation), providing more budget relief when we'll likely need it most.
Stagflation, an entrenched state of high inflation coupled with a weak economy and high unemployment, is on everyone's radar. Currently, our inflation isn't high enough, having come down to around 2% from over 8%, and an unemployment rate still within the 6's range.
The large-scale trade disruption could change that scenario if push-cost inflation (artificially higher consumer prices due to tariffs instead of high demand) soars and declining interest rates take a while to spur economic activity.
Fact: A recession is technically considered an economic contraction reported for at least two financial quarters in a row, but typically a pronounced and persistent period of economic decline.
Home affordability had improved slightly in early 2025 as interest rates went lower and trade uncertainty kept a lid on demand and prices.
There was anticipation of a spring housing market rush as prime rates ease off and variable rates lower — however, if the trade war continues, many will likely hold off buying a home amid economic uncertainty.
More listings are already appearing from sellers hoping to get the price they want for their home or to escape restrictive rates. Those who have enough financial depth may go looking and are likely to get deals on both mortgage rates and home prices if market competition remains subdued.
With over 1M renewals coming up in 2025, there is new hope for lowering rates to buffer potential payment increases.
Read more here about how tariffs could impact the 2025 housing market.
Whether rates are falling or rising, your best rate and mortgage can help you better afford your home. Many Canadians are still very unaware that they don't have to stick to their bank for a mortgage, for a purchase, renewal or refinance.
First-time home buyers, especially, need expert advice to set them on a path to successful homeownership amid all these price pressures.
Variable rates are moving down and can offer instant budget savings at each rate cut versus locking into a 5-year fixed rate and watching rates drop from the sidelines. If you get nervous, you can always lock into a fixed rate without penalty (most lenders allow this mortgage move).
Waiting to see what rates will do? Consider locking into a shorter fixed rate — such as our low short-term fixed Rate Relief™ product. If this product is right for you, it can help you bridge the gap with budget relief now while allowing time to pass before deciding on a longer commitment.
Owning a home is a tremendous source of pride in Canada. I created True North to provide clients with a better mortgage experience and save them thousands with their best rate and mortgage choice.
Have questions about your mortgage or pre-approval? Give us a shout, anywhere you are in Canada. We have your best rate, expert advice and unbeatable service — with over 15,000 5-star reviews from our happy clients.
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