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 April 16, 2025, the Bank of Canada held its policy rate rope-steady — at 2.75%, and most bank prime rates will hold at 4.95%.
In the economic tug-of-war between inflation and economic weakening due to the U.S. trade war, the BoC is trying to avoid rope burn. There's strain and struggle, hanging on until the way to win becomes clear.
Stay tuned for the next rate decision on June 4, 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) — and is expected to go lower to spur economic growth.
U.S. tariffs are creating market mayhem. The BoC is immediately concerned about thwarting an upward inflationary trend and taking time to assess economic conditions.
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.
After April's rate pause, June's rate decision is likely already moving toward a cut. As that rate date approaches, we'll see if the recessionary side of the economic tug-of-war beefs up with weaker numbers.
March's lower Canadian inflation report offers a respite in the recent upward inflation trend. However, experts are divided on whether price-pace cooling will continue, or whether sticky core inflation will thwart the central bank's inflation-taming efforts, keeping the tension on another potential rate pause.
And if tariff-induced inflation rises and the economy slackens quickly, there's likely only one direction for interest rates to go at the next date (a drawdown).
Just as there were inflationary pressures behind the latest rate pause (with potentially more to come in the form of cost-push tariff inflation), there are also disinflationary pressures pulling against them to reduce business input costs or directly ease consumer prices, such as:
Like April's rate decision, unprecedented uncertainty for inflation and the economy could make the next few rate calls a nail-biter.
The BoC will focus on immediate signs rather than trying to mitigate for future numbers (as unpredictable as U.S. President Trump's fiscal policies).
So, we wait and watch how this trade and economic tug-of-war drama unfolds (it usually ends with someone in the mud).
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.
If no tariffs had materialized — I expected a BoC resting rate of 2.5% by the end of 2025.
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%.
I believe that the BoC's policy rate will come down to 2.25% by the third quarter of 2025. A tariff-induced recession could see the cuts coming faster and deeper. However, rate pauses could come at any time if inflationary winds are blowing through its hair.
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.
Is there a danger that the prime rate could increase?
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.
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 March dipped to 2.3% (from February's 2.7%), with the GST holiday concluding on Feb. 15. Core inflation also declined slightly to 2.85%.
These numbers, while an improvement over last month, are still above the BoC's 2.0% target. Some comfort can be taken, however, that the pace of gas, travel and shelter led the decline. Groceries didn't slow, which most Canadians won't be surprised at after a trip to the store.
Canadians are already pulling back their spending dollars amid financial uncertainty due to the trade war, which is helping to lower some prices. Also, the rising Canadian dollar and lower oil prices are helping to push back against potential tariff-related price increases.
The March unemployment rate rose to 6.7% from 6.6% last month, 33K jobs were lost, and wage inflation dropped to 3.6% (from 3.8% last month). All told, this report adds fuel to suggestions of a coming recession.
Clearly, Canadian businesses took Trump's tariff threats seriously as to how they might affect their bottom lines, hiring projections (or in this case, firing projections), and future investment sentiments.
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 — or if home prices rise from a lack of inventory.
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:
Here's a look at the inflation rate over the past year — now hovering 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 are easing to 2.7%, as continued U.S. political and trade turmoil throws markets back and forth. Ultimately, in the short term, the chaos is likely to pressure yields, along with tariff-induced price impacts that may slowly trickle down to consumers, keeping yields lofty until any economic repercussions start to show in real-time numbers.
The BoC is dealing with a tug-of-war between inflationary and recessionary concerns over where interest rates may be headed (which the bond market tries hard to anticipate) as lagging indicators begin to tell the story of our economy's performance in light of this new trade volatility.
For now, expect lender specials to pop up or disappear quickly on specific fixed-rate terms, 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 a rollercoaster ride) as markets grapple with the repercussions of a potential recession from trade disruption.
But if inflation rears its head before a recession hits, look for fixed rates to increase slightly if yields stick on an upward trend.
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. However, the recent trade disruption may finally 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 didn't materialize. Until Trump took office, Canada's 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 and spending pull back would place downward pressure on inflation's pace), 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. The conditions for stagflation don't currently exist, as our inflation pace isn't high enough, having come down to around 2% from over 8%, and our unemployment rate is still within the 6's range.
Those conditions could change if cost-push inflation (artificially higher consumer prices due to tariffs instead of high demand) soars, the economy weakens, and declining interest rates don't spur enough (or fast enough) rebound spending.
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 has improved slightly in early 2025 as interest rates went lower, and home prices have remained relatively flat.
There was anticipation of a spring housing rush as prime rates ease off — however, if the trade war continues, many home buyers will likely hold off on a purchase amid this economic uncertainty.
Sellers are disappearing from housing activity as well, not wanting to make their move until some of the tariff dust settles or when higher demand can help them get a good selling price.
Buyers who have enough financial depth or need to move will still go looking and are likely to find deals on both mortgage rates and home prices if market competition remains subdued.
And with over 1M renewals coming up in 2025, mortgage activity will (always) soldier on. At the very least, renewers can look toward lowering rates this year to help buffer the differential between then and now rates for (hopefully) better mortgage payments than they had worried about.
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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