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? Both trade trouble and inflation trouble are headlining. The BoC is like a cat on a hot tin roof, contemplating the complexities and whether rate cuts or rate pauses are the answer. Here's what I see.
January 29, 2025 — The Bank of Canada steps into an already ‘blustery’ 2025 with a single rate cut of 0.25%. Its policy rate now stands at 3.0%, and most bank prime rates will slip from 5.45% to 5.20%.
Directly ahead? A sudden patch of tariff-lined ice now looms as the returning U.S. President threatens a trade-policy blowout. Hitting it (Bambi-flail style) would likely bring a fresh set of inflation variables while the BoC also weighs how to keep the economy upright.
Stay tuned for the next rate decision on March 12, 2025. Get timely updates — sign up for our newsletter.
The ice is now afoot. Tariffs aren't yet a reality, but just the threat is already disrupting markets and business sentiment. This blog will focus on watching the factors and reading the numbers for real-time insights and forecasts.
For deeper insight into how and why trade disruption could impact mortgage rates, including updates on tariff dates, read our companion blog: How Trump's Tariffs Could Impact Mortgage Rates in 2025
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%.
With Trump tariffs looming, the complications of economic disruption AND inflation pressures will feed into the BoC's next rate decision.
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.
Despite the Bank of Canada reining in interest rates in 2024, Canadian economic recovery is still a chicken roaming around the woods at night (trying to avoid U.S. tariffs, aka lions and tigers and bears).
As the long period of restrictive interest rates works its way forward, the BoC is still in a strong position to lower its policy rate further — as it contemplates a weaker economy that will help push back against current inflationary pressures, such as the lowering dollar (currently trading below 70 cents U.S. and expected to go lower), a heating labour market, and a revving U.S. economy.
(The recent G.S.T. holiday will skew inflation numbers for a couple of months, but the BoC will look beyond that for inflation's progress.)
A recent RBC survey demonstrates the state of 'kitchen table' economics; almost half indicated they feel like they'll never be able to get ahead or that their standard of living is declining.
Plus, consumers and businesses are now held in hand-wringing purgatory, watching a tariff boom about to hit.
That boom is Trump's threat of 25% tariffs (or more) on Canadian goods that could do damage before he ever actually imposes the tariffs; his political bluster makes it impossible to predict any true outcome.
Read more here on how Trump's tariffs could alter Canada's interest rate path this year.
The BoC's rate-cutting course will need to navigate through increasing complexity as our two countries' politicos push their way through 2025.
"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 are feeling the heat as a trade disruption mood is our new normal. Yet, as predicted, inflation (the kind the BoC mostly has control over) is creeping back up.
Yet, I think the BoC will cut again in March to aid our sluggish economy in light of trade impacts already being felt, such as reduced orders and subdued business investment sentiment.
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.
November Canadian GDP didn't gain but instead contracted by 0.2%. It's not all bad news, however, in that the 'negativity' is chalked up to temporary setbacks, such as labour strikes (e.g. Canada Post) that especially hit the transport sector. (A Taylor Swift bump supported the economic contraction from being lower.)
Some recovery is projected for December, which could peg final-quarter-2024 growth at the BoC's estimate of 1.8%. If that momentum turns true, it would mean slight growth seen in GDP per capita for the first time in 7 quarters and growth of 1.3% in 2024.
The BoC also now projects GDP will grow by 1.8% in both 2025 and 2026.
But that's crawling, not walking. Bursting into a full run seems like a whole other development milestone. If the U.S. and Canada throw up tariff baby gates on all the doors — these current GDP forecasts won't be enough to withstand those headwinds.
An economic breakaway possibility? If provinces can agree to remove most inter-provincial trade barriers, the positive GDP bump could help buffer tariff troubles.
National housing market sales cooled towards the end of 2024 as people shopped on behalf of loved ones instead of a home, though activity was up about 19% from this time last year; home prices are still relatively stable for now.
Despite declining interest rates (and new mortgage rules that favour younger buyers), the threat of tariffs may be enough to mute a spring rush, as buyers and sellers stay on the sidelines a little longer, concerned about their financial futures.
If a big rush does come, too-hot home sales and resulting price pressures are a concern. These could cancel out any cooling effect of lowering rates for the 'shelter cost' component of the CPI (Consumer Price Index) basket. Not to mention the impact on home affordability, which has only recently improved.
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:
Adding the rate spread to a potential rise in demand-pull inflation from tariff-supply disruption could result in a BoC rate pause until wider economic damage makes a case for further cuts unrefutable.
If inflation cooperates to stay within the central bank's target range of 1-3%, our economy is still far too sluggish. In this case, BoC rate drops of at least 0.25% would likely continue during the first half of 2025. But if underlying inflation is knocking at the 'rate pause' door, the central bank will consider pausing its agenda to assess.
I believe the BoC's policy rate isn't 'neutral' enough yet. I'm holding out a forecast for a resting BoC rate of 2.50% — for a total prime rate drop of 2.5% by the end of 2025. Some experts have pegged a BoC resting rate of 2.0% in 2025 to spark our economy in light of trade turmoil, though too many brambles lie along that prediction lane at the moment.
We'll see how markets (and nerves) progress as the year's political drama plays out.
Read here for how full-blown tariffs could affect mortgage rates this year.
With 2 interest rate cuts already priced into current rate markets, I see the BoC bringing its rate another 1.0% to 1.25% lower — to 1.5% or 1.25% if we're dealing with a tariff-induced recession.
Note here that bond yields, which inform fixed rates, will have a mix of forces pushing and pulling, and a dedicated downward trend will only occur if more than 2 interest rate cuts are anticipated.
But nothing is certain right now, and there is likely to be a whirlwind of activity in the short term. I won't believe anything until we see the facts roll in (and stay put for a time).
The BoC has 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 an intense hike schedule over two years.
There's always that danger, and although the economic (and tariff threat) softening already underfoot makes it unlikely. The crystal ball's in the air for how this year's economy will land.
"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 2023 CPI readings here.
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 up around 2.9% after a January Canadian inflation reading of 1.9% delivered G.S.T. holiday price distortion that masked underlying rising core inflation. This inflation pressure will keep pressure on bond yields and the BoC for its next rate decisions, pushing against the need to cut ahead of potential trade disruption.
Bond traders are also grappling with Trump's tariff rhetoric, with announcements starting to pile up ahead of supposed implementation dates. Yields will continue to be volatile, pushed around by different factors, like higher inflation one minute, then trade tariff rumours begging for interest rate cuts the next.
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 already largely factored in another two BoC prime rate cuts, potential tariffs notwithstanding. Recent market jolts and future uncertainty may hold them to a tight range for a while longer. 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 bond yield calm reigns (and so does the economic turmoil), a 0.25% fixed-rate decline may be possible over time if the BoC policy rate falls below the neutral rate (currently considered to be around 2.75%) before the end of 2025.
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.
We may see the best 5-year fixed rates stabilize into the high 3's as prime rates make their way down to a more typical spread relationship.
If you're considering buying a home or renewing sometime in the next few months, talk to one of our expert brokers about getting a rate hold. It could protect you from rate volatility, and you'll still get a lower rate if it goes down during your hold.
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 finally relenting to the pressures of higher rates, with declining inflation and a more downtrodden jobs market than they've seen in months. However, their recent numbers have improved, inflation is creeping up again, and continued cuts are looking unlikely.
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. That doesn't mean the trajectory for a soft landing — meaning no recession or a very mild one — is an absolute. Nothing is ever certain in love or economics.
Back in October 2023, the Bank of Canada referred to projected economic faring as 'low positive growth' that will walk the line and possibly dip into negative territory (but not as a full-blown 'recession'). So far, that's coming true, with projected 2024/2025 GDP skimming above the line.
There's optimism — excluding a tariff scenario — that market resilience will keep our economy out of recessionary territory. Experts had projected a mild recession through the first half of 2024, which did not materialize. However, these higher rates are still working through the economy, and coupled with new uncertainties (mostly the U.S.'s impact on growth and trade agreements), we may yet see recessionary conditions creep into 2025.
Our labour market is still showing broader signs of system stress, household budgets are straining under the higher prices all around, and a wall of mortgage renewals upcoming in 2025 and 2026 could further test discretionary spending.
If economic weakening accelerates beyond expectations, the BoC would likely drop prime rates faster (depending 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. Right now, according to the BoC, "it's not where we are now" as 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.
A large-scale trade disruption could change our 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.
Along with an anticipated period of declining interest rates, a spate of new mortgage rules should help improve affordability for some home buyers and enable more homeowners to save on their mortgage renewals:
Effective December 15, 2024:
Starting January 15, 2025
Home affordability improved slightly in 2024 as interest rates lowered. There is anticipation of a spring housing market rush as prime rates ease off and variable rate discounts grow — however, the recent tariff threats may still keep many on the sidelines waiting for more information.
As always, we offer great rates and specials, and are attracting many mortgagees who look to lower their monthly costs while taking advantage of housing deals in their area.
There are mixed predictions about how lowering rates will affect housing prices. More sellers are listing to get out of restrictive rates, yet markets still have plenty of potential to skyrocket in demand due to the high immigration numbers Canada has seen in recent years.
Depending on your details and needs, our low short-term fixed Rate Relief™ product can help you bridge the gap with budget relief now, enabling your dream home purchase sooner, with the hope of renewing into lowered market rates.
Read more here about how high mortgage rates may impact the 2025 housing market.
Around 2M Canadians are coming up for renewal within the next couple of years. Interest rates are coming down, but homeowners could still take a budget hit if they're renewing into higher rates than they just had.
The most important thing you can do in this market is shop around for your best rate and product. Many Canadians are still very unaware that they don't have to stick to their bank for a mortgage.
We exist to do the comparing on behalf of our clients, checking with several accredited and alternative lenders for the best solution and budget fit for their needs, while passing along a volume rate discount. We're fast, we speak several languages, and we're very good at what we do — which is why we have the most 5-star reviews in the industry.
First-time home buyers especially need expert advice to set them on a path to successful homeownership amid these price pressures.
Which rate should you choose? Variable rates are trending 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. You can always lock into a shorter fixed rate if you get too nervous.
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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