How Trump's Tariffs Could Impact Mortgage Rates in 2025

Tariffs would bring a different kind of inflation.

There's more than one kind of inflation? More specifically, there are different mechanisms that can inflate inflation.

Demand-pull inflation is what we're used to, where prices rise from hotter demand while supply lacks and which the BoC fights to cool down with higher interest rates (as we saw with the post-pandemic boom).

However, higher prices passed onto consumers due to 'artificially' higher input costs for businesses (say, from broad tariffs) are seen as push-cost inflation.

Push-cost inflation from tariffs wouldn't necessarily invite the same central bank rate-hike solution as demand-pull inflation.

In fact, raising interest rates to combat flourishing push-cost inflation could cause deeper economic damage and risk stagflation — an entrenched state of high inflation coupled with a weak economy and high unemployment.

Keep in mind that Canada’s economy is still in recovery mode from recent higher interest rates — and current GDP projections lack the momentum to sustain very long against the percussive pounding of all-out tariffs.

Variable mortgage rates — flexibility in uncertain 'tariff' times.

The variable advantage: Interest rates would likely go much lower.

The Bank of Canada may be "forced into additional interest rate easing to the tune of 50–75 basis points (bps) [equivalent to 0.50-0.75% in rate cuts]."

– TD economics report delving into the ramifications of only a 10% U.S. tariff imposed on all Canadian goods, October 2024

Variable mortgage rates (and those for HELOCs) float and change along with the Bank of Canada's interest rate movements (which inform bank prime rates).

Just the threat of tariffs is impacting markets due to underlying nervousness about Canada's ability to grow its economy.

If the Bank of Canada needs to drill down its policy rate to prop up a tariff-weakened economy (or the suggestion of one), variable rates could decrease further in 2025 than originally forecast (sans tariffs).

For homeowners, the result could translate into significant savings from lower mortgage payments (or reduction in amortization for those with fixed-payment variable mortgages) — a potential silver lining for those comfortable banking on the 'risk for change' posed by a variable rate choice.

Would the BoC raise rates to combat higher 'tariff' inflation?

"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.”

– Bank of Canada Governor Tiff Macklem, Jan. 29, 2025

As we mentioned, historically, central banks have been cautious about raising rates to address escalating push-cost inflation. Higher rates would increase consumer and borrower costs and deepen the economic trench.

The BoC's sole mandate is to keep inflation to a 2.0% target. But this push-cost inflation would be superimposed on an already weakened Canadian economy (ironically, a result of recent higher rates imposed to tame inflation that went as high as 8.3% in June 2022). The central bank would shift its focus from fighting inflation to supporting the economy.

However, inflationary pressures and trade volatility on both sides of the border may still limit the BoC's ability to cut rates as quickly as the economy requires.

If demand tanks due to job losses, wouldn't that lower inflation?

The lowered demand due to job losses may temporarily increase supply and business competition. Considering our economy already has excess supply, prices for certain goods could decrease.

However, supply chains would experience interruptions, and businesses' input costs would ramp up quickly. At some point, companies would need to pass the costs to consumers to stay afloat.

Energy prices would probably be the first to increase. After all, the U.S. imports Canadian crude for almost 60% of its needs, with some re-crossing the border back into Central Canada (assuming this sector isn't completely omitted from tariff policy).

In response to tariffs, would interest rate cuts happen sooner, or later?

Trump's trade bluster likely contributed to a second BoC policy rate double-cut in December 2024 — a pre-emptive kickstart ahead of potential economic turmoil coming in the New Year.

For its January 2025 rate decision, the BoC maintained its rate-cutting course to draw down its policy rate to 3.0% (from a mid-2024 high of 5.0%).

With tariff threats already affecting some Canadian businesses, the odds have flipped to seeing more continued cuts in early 2025 (vs. a rate pause) as worries also flipped from inflation's advance to worsening economic conditions in light of Trump's next Oval Office turn.

If blanket tariffs become a fast reality, the cuts could speed up — with talk of a BoC inter-meeting cut possible (a policy rate decision handed down between set dates) to get ahead of a downturn.

What about early demand-pull inflation?

The central bank could still pause its policy rate in early 2025 to help keep a lid on demand-pull inflationary pressures in the short term if needed — especially if a tariff pause continues or if tariffs are enacted and then quickly removed.

There are plenty of inflationary pressures going around that could complicate the BoC's decisions in the next few months (like a lowering Canadian dollar, an improving unemployment rate, a widening rate divergence with the U.S. Fed, and U.S. inflation pushing 3.0% due to a stronger economy).

Further rate hikes are (hopefully) unlikely, with Canada’s economy still reeling from the last rate-hike go-round.

Fixed mortgage rates — stability amid trade and economic shifts.

Unlike variable rates, fixed mortgage rates are influenced by the bond market and set according to bond yields, which respond to market factors and fluctuations. This rate type doesn't follow interest rate changes but instead anticipates where they're going.

Fixed mortgage rates are the favourite choice of risk-averse homeowners, and many may stick with this choice during economic volatility despite any potential savings from variable rates.

The 5-year fixed rate could come down in the face of full tariffs (or even with tariff threats).

The standard 5-year fixed rate had been largely expected to maintain its current level for a while longer having already priced in 2 more expected prime rate cuts. (The bond market still faces upward pressure by inflationary headwinds, such as a lowering Canadian dollar and a stronger U.S. economy.)

However, if tariff threats become a reality — or threats spook the markets enough — investors will likely seek safer assets, increasing demand for Canadian government bonds, which typically drives bond prices up and yields down.

And, if there are suspicions that the Bank of Canada will reduce its policy rate beyond current expectations to address a declining economy, yields and fixed rates would also go lower sooner in 2025 than initially forecast.

At some point, they'll be done lowering and hold to a tight range while interest rates make their way down.

But still be higher than a variable rate.

5-year fixed rates are usually higher than 5-year variable rates (including lender discount off prime) by a spread of about 0.25% to 1.0%. Variable rates are typically lower than fixed rates because of the increased risk of change.

This natural rate relationship flipped during the post-pandemic Bank of Canada's 'extremely fast' rate-hike cycle.

As interest rates return to earth, these rate types will assume their historical spread relationship.

Keep in mind that typical lender 'discounts off prime' offered on variable rates may shrink during times of significant financial stress but are still likely to deliver mortgage savings over a fixed rate.

How would fixed rates behave with tariff on, tariff off?

Much more so than the variable rate (prime rate decisions occur only eight times a year), the 5-year fixed rate would register ongoing volatility if, instead of full-blown tariff disruption, there were 'negotiations' and threats in tariffs along the way.

Market uncertainty could push bond yields around, and mortgage lenders would raise and lower fixed rates accordingly to keep their mortgage costs in line.

Wouldn't bond yields increase in response to tariff-induced inflation?

Again, because push-cost inflation affects the economy differently than demand-pull inflation, the anticipation of lowering interest rates would eventually reign over the bond market as investors turn to safer government bonds during a weaker economic print.

Could higher inflation in early 2025 raise Canadian fixed rates?

Yes, that's possible. Early on, the 5-year fixed rate could still be pushed higher by another 0.15% (or more).

The 5-year Canadian bond yield has bounced around amid recent inflationary pressures and threats of economic instability.

Bond yields could go higher in reaction to shorter-term pressures like increasing Canadian or U.S. inflation in the first few months of the year before blanket tariffs hammer the trade relationship. Look to upcoming economic readings to see how bond yields react.

However, fixed rates could also decrease if a major trade disruption on both sides looks more certain.

Tit-for-tat? Tariff-for-tariff?

"Just as Trump "intends to fill America’s coffers with tariff revenues," Canada "can do the same," suggesting that Canada could re-distribute the revenue generated by counter-tariffs to workers hard hit by a tariff war."

– Chrystia Freeland paraphrased in Toronto Star article, MacCharles, Jan. 17. 2025

Foreign Affairs Minister Joly recently suggested that job losses from Trump's threatened tariffs would first occur to "the sectors most vulnerable to tariffs include manufacturing, mining, the energy sector, agriculture and forestry," and have knock-on effects "on other sectors, like retail, education, and health care."

Canadian Prime Minister Trudeau's planned tariff retaliation is on hold, waiting for Trump's next move.

Trudeau has indicated that 25% tariffs on $155B imported U.S. goods are waiting in the wings — and whether he employs them will depend on how Trump proceeds with trade negotiations.

If the holds come off and trade disruption occurs, Canada's businesses and industries will experience the shock of input cost and supply chain havoc, made even worse if energy prices rise.

The result could be an immediately deteriorating economy with higher unemployment, weaker GDP numbers, reduced consumer spending, and increasing inflation.

(The U.S. would likely also face economic turmoil, including job losses and higher inflation, which happened the last time Trump imposed only targeted tariffs in 2019.)

Would revenue from tariff retaliation be enough to cushion the tariff-induced inflation and job loss blow?

• Even with the additional revenue, Canadian consumers could face higher costs, eroding disposable income and dampening economic growth.
• Tariff revenues are unlikely to fully neutralize the inflationary pressures because they do not directly reduce consumer prices.
• While tariff revenue can be redirected to support workers or industries through targeted programs, historically, it has generally been insufficient to fully compensate for widespread job losses or economic disruption.

Our current federal government is talking 'tariff relief' — but could that worsen the economics?

Government tariff relief would likely also not be able to fully compensate for business or individual financial losses due to tariff trade disruption, though it may help in the short term.

However, the government borrowing necessary for such relief may eventually result in increased taxes and higher interest rates — as government spending can often come at an economic cost that's paid later.

What about reducing Canadian inter-provincial trade barriers to buffer the impact?

Yes, what a great idea (which isn't new...). Goods don't flow uninhibited within Canada, roughly the equivalent of 21% tariffs.

Several experts have mentioned that reducing trade barriers within Canada — yes, that means between provinces — might provide an economic boost when we need it most. According to Internal Trade Minister Anand, it could "lower prices by up to 15%, boost productivity by up to 7% and add up to $200B to the domestic economy." (CBC News, Feb. 5, 2025).

More free-flowing internal trade could also ease international partners' access to Canadian goods.

These barriers exist for several reasons, such as provincial industry protectionism and lack of standardization for things like food containers and sizes.

The Canada Free Trade Agreement was formed between 'Canada' and its provinces in 2017 to iron out some of these obstacles. However, it hasn't budged much since then, with "almost 400 pages of carve-outs and exceptions to free trade in Canada."

Perhaps it's what they say — good 'trade relationships' begin at home? Let's hope this neighbourly solution happens quickly.

Is there any silver lining to this trade dispute started by the U.S.?

It's obvious that major adjustments will need to be made, both in the short and long term.

Federal and provincial efforts to reduce regulatory barriers — such as interprovincial trade restrictions, homebuilding regulations, pipeline obstacles, and manufacturing constraints — could help improve local and international supply chains and economic resilience.

Streamlining these processes may also support Canada's ability to diversify global trade partnerships and mitigate economic disruptions.

Initiatives to 'Buy Canadian' to support local businesses are already underway, as many realize just how many daily purchases they make of 'American goods.'

The Smoot-Hawley Tariff Act of 1930: A great depression that seemed to end the trade tariff argument. Until now?

"...when US Republicans passed the calamitous 1930s Smoot-Hawley tariffs, Canada was the first to hit back, doing so before the US had even finished legislating."

– BBC News, Feb. 6, 2025

Until now, everyone thought the world trade community had learned its lesson from the 1930 World Trade War, which the U.S. Tariff Act started. The resulting (legendary) negative economic repercussions reverberated for decades.

Named after its sponsors, Senator Reed Smoot of Utah and Representative Willis C. Hawley of Oregon, this Act intended to shield American farmers and manufacturers from foreign competition by significantly raising tariffs on a wide array of imported goods.

U.S. President Edgar Hoover signed it into law in 1930 despite warnings from economists and business leaders about its potential adverse effects.

• The Act raised tariffs on over 20,000 imported goods to historically high levels, with some duties exceeding 50% (like on Canadian wheat and dairy)
• Several countries, including Canada, responded with their own tariffs on U.S. goods, reducing international trade
• The global tariff war worsened the global economic downturn by disrupting trade flows and exacerbating conditions that led to the Great Depression, a severe economic crisis of the 1930s

1930 was a long time ago. The global trade economy is far larger and more interconnected today.

It seems hard to believe that a nation as powerful as the U.S. would entertain these types of trade restrictions (Canada is not the only country being targeted), risking a global trade war, or at the very least, one with a friendly, neighbouring country, at the expense of economic growth and prosperity.

So, we take a measured (mortgage) outlook and wait to see if the bluster becomes a blatant reality. And then how hard that reality could hit.

Mortgage Rates in 2025 — no tariffs, with tariffs, or somewhere in between.

For those of you who regularly tap into our 2025 Mortgage Rate Forecast blog — which features insights from True North CEO Dan Eisner and continually updated economic factors and numbers — follow along as we outline the political maneuverings and try to predict the (mortgage) rate road ahead.

If tariffs don't materialize — We'll keep watching inflation and other factors and hopefully see the Bank of Canada further lower its policy rate this year. How far interest rates will go (to the neutral rate or beyond) will depend on stimulating economic growth while likely contending with stronger U.S. growth.

If tariffs come on full board — How long they stay could completely change the economic outlook for 2025 and beyond, and lower interest rates are likely to soon follow.

If tariffs land somewhere in between — Not all goods, not all 25% tariffs? Then, it's back to one month's economic readings at a time to assess the impact and where the Bank of Canada would take its policy rate from there (with an economy that's still recovering from higher interest rates).

In this case, the Bank of Canada's interest rate decisions would become more complicated as it seeks to tamp down inflation while encouraging healthy consumer demand.

True North has been jackhammering mortgage rates for over 18 years.

We're Canadian through and through (you can tell by our name). We exist to help you save on mortgage rates. And for you to have a better option than just caving to your big bank.

Tariffs or no tariffs, wherever the economy takes us, our highly trained, salaried (non-commissioned) brokers are well-positioned to offer discounted rates, exceptional free service, fewer fees, and less costly penalties.

You can count on a simple process and unbiased advice to outline clearer choices.

During this time of uncertainty, we're here to help answer all your questions — and help you continue along your (mortgage) way.

Give us a shout, anywhere you are in Canada. Our fast, simple, free service is available online, by phone or email, or at a store near you.