Dan Eisner, True North Founder and CEO, speculates on emerging economic factors and where interest rates may be headed.
Fixed and variable rates have (thankfully) come down. Do they have farther to go? Trade disruption is pulling rate forecasts one way, while inflation pulls another. Here’s my take on the economic tug-of-war that could impact rates this year.
On March 12, 2025, the BoC strapped on the protective gear and came in elbows up with a rate slash — fighting back (economically, of course) against the impact of U.S. trade tariffs. It was the 7th rate cut in a row since June 2024.
The Bank of Canada interest rate dropped to 2.75%, and most bank prime rates fell from 5.20% to 4.95%.
Stay tuned for the next rate decision on April 16, 2025. Get timely updates — sign up for our newsletter.
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.
After 9 cuts of 0.25% since June 2024, the Bank of Canada's policy rate has reached its theoretical 'neutral rate' of 2.75% (from a 5.0% high). Still recovering from the pandemic event, the U.S. trade war has injected new economic uncertainty and talk of a recession in Canada — and how low interest rates might go.
If Trump's tariffs bring on a recession, inflationary pressures will still be a major concern, but rates would likely trend down in the near term. It's volatile right now, and rate forecasts may change quickly.
For deeper insight into how and why trade disruption could affect 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
Prime rates affect variable mortgage rates, and fixed mortgage rates are set by the bond market.
If the current trade war turmoil, reignited on April 2 by Trump's 25% Canadian auto tariffs, has any say, the April rate announcement will pull heavier towards a rate cut rather than a pause.
The BoC is now in a tug-of-war, choosing between economic weakening already underway (and that to come) and warming inflation from tariffs (the central bank noted these concerns in comments delivered with its latest rate cut).
Trade turmoil. Trump's constant shifting of his (aggressive) position and Canada's retaliation with its own tariffs on U.S. imports seem to have provoked a new state of normal — with nothing normal about it.
Unprecedented uncertainty for both inflation and the economy. Projections are multiplying for how interest rates could be called in the first half of 2025. Ultimately, the R-word (recession) would likely rule above all, including tariff-induced inflation (businesses are already signalling that higher prices may need to be passed onto consumers). If growth turns negative, interest rates would need to decline to help hurting households and to get things moving.
An important consideration for any attempts to forecast the path of interest rates this year? The BoC wants to assert credibility in its sole mandate — fighting inflation to ensure a healthy economic outcome. It will seek to discourage people from writing higher inflation into their futures (that could translate into asking for higher wages, which fuels inflation's persistence).
Accordingly, the BoC recently unshackled itself from an expected rate path, saying that it will focus on responding to immediate concerns rather than trying to predict how the economy will react.
Inflation of a different kind?
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 cost-push inflation. Raising interest rates against this type of inflation dilemma could lead to deeper economic damage, risking stagflation.
After March's cut, the BoC's policy rate still isn't low enough to encourage a consistent hum of economic growth during what would have been more 'normal' times.
Both inflation and Canada's economic engine were heating up towards the end of 2024, and a policy rate of 2.50% may have been stimulus enough to spur recovery after 2 years of high interest rates while keeping inflation in check.
That would have meant a total prime rate drop of 2.5% (from the high of 7.20% in 2024) by the end of 2025.
(Prime rate drops directly impact variable mortgage rates.)
I think it's important to keep this forecast here for a time, offering a contrast with what is happening now at the behest of U.S. imposed trade turmoil.
Whether it's the threat of U.S. tariffs, a full-blown trade war, or higher tariffs on only certain goods, the impact on our economy is already evident, with small businesses the first to suffer the most.
With an eye on potential price volatility, some economists predict the BoC might have to cut its rate another 2 to 5 times (0.25% drops) to a policy rate of at least 2.25% (and maybe as far down as 1.5%) — for a prime rate of least 4.45%, assuming the current spread with the policy rate of +2.20%.
A tariff-induced recession could see the cuts coming faster and deeper.
However, the central bank may need to consider rate pauses with inflationary headwinds blowing through its hair, especially if it needs to reassert its inflationary-fighting position to remind markets (and Canadians) of that priority.
Everything is uncertain right now. Stay with us as we seek some level of certainty about 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) is pegged 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 softening already underway makes it unlikely — unless the central bank decides to fight inflation, no matter the cause.
Note that bond yields, which inform fixed rates, will be pushed and pulled by a mix of forces. However, if more than one interest rate cut is anticipated, look for a dedicated downward trend.
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 its current rate-cut agenda.
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 2.6% (from January's 1.9%), with the GST holiday concluding on Feb. 15. Core inflation also rose to 2.7%.
These numbers, now above the BoC's 2.0% target, finally reveal the price pressures bubbling up over the last few months, including increasing consumer spending (encouraged by the GST reduction), a rate divergence with the U.S., and a lower CDN dollar.
On the horizon, however, Canadians may substantially pull back their spending dollars amid financial uncertainty due to the trade war — for a deflationary effect.
The February unemployment rate was unchanged at 6.6%, and 1.1K jobs were created, much less than the 20K expected. Wage inflation also increased to 3.8% (from 3.5% last month), another factor adding to inflation creep.
According to a report from the National Bank, Canadian population growth is slowing dramatically as immigration targets are reduced, which may result in restraining the unemployment rate between 6.6% and 6.8% in 2025.
Note that this report doesn't yet log the influence of the U.S. trade war at hand.
Canadian GDP in 2024 grew by more than expected, with a revised 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%.
And January 2025 looks to have continued that economic warming, with a reported growth pace of 0.4%, the strongest monthly showing since April 2024.
But don't break out the barbeque yet — February numbers may run smack into a cold front instigated by Trump's tariffs and resulting economic stability.
National housing activity fell in February 2025, with both sales and listings falling by double digits; 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 — now down around 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 have sunk into the 2.5% range as world markets reel from Trump's tariff instigations and bond markets read it as future lower interest rates.
Bond markets will likely continue a tug-of-war between inflationary and recessionary concerns over where interest rates may be headed (which the bond market tries hard to anticipate).
Weakened consumer spending could eventually put downward pressure on prices. Canadians are already pulling back on discretionary spending (like cars and appliances), which would see rates confidently come down to support a potential recession.
The bond market will continue to fluctuate as tariffs begin to weigh on the market and as lagging indicators begin to tell the story of our economy's performance
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 have largely factored in one more BoC prime rate cut.
Trade uncertainty may see them drop more (still with the potential for rollercoaster increases) as markets grapple with the repercussions of a potential recession from trade disruption.
If it seems abundantly apparent that the economy needs rate cuts regardless of rising inflation, fixed rates could decline further than initially thought (it's too soon to call a potential drop amount).
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 Trump's tariffs and mass government firings are showing up as underlying cracks.
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 post-pandemic, a mild recession had been expected through the first half of 2024, which did not materialize. 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 our unemployment rate is still within the 6's range.
The large-scale trade disruption could change that scenario if cost-push 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.
Sellers are disappearing from housing activity as well. Those who have enough financial depth may go looking and are likely to find 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 mortgage 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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