Recent months have already seen upward pressure on fixed rates, a trend that could intensify as US-Canada trade relations worsen
The Bank of Canada is expected to keep its benchmark interest rate on hold when it meets next week, prolonging its wait-and-see approach even as trade tensions ramp up between the US and Canada.
Many economists see that stance continuing through the coming months, meaning variable rates aren’t likely to budge anytime soon – but there could be bigger questions ahead about the direction of fixed rates.
Government of Canada bond yields have crept higher in recent months, and a recent upswing in US Treasury yields could also be about to intensify that trend.
Dominion Lending Centres Group (DLCG) chief economist Sherry Cooper (pictured top) told Canadian Mortgage Professional that bond market jitters south of the border could also impact the rate outlook in Canada.
“Another question mark is interest rates and market-driven interest rates,” Cooper said. “Last week, we saw a rise in US long-term interest rates, thanks in large measure to inflation fear – but mostly the $40 trillion worth of US government debt and very, very strong corporate borrowing by AI-related firms.
“So there’s [concern about] government borrowing in the US, and upward pressure on their long-term interest rates generally spills into Canada. That’s another big uncertainty.”
Fixed-vs-variable question takes on a new dimension
Inflation concerns have already been on the rise across both Canada and the US in recent months, spurred mainly by the war in Iran and spiking oil prices. And the tariff war – which will likely see higher prices passed onto the consumer across a range of goods in both countries – could inflame that outlook further.
“It’s just a very dicey scenario,” Micky Khaneka (pictured below), a Toronto-based mortgage broker with Team MKG, told CMP. “If the tariffs… keep continuing to push costs over, it will eventually lead to higher inflation, which would then eventually put upward pressure on bond yields – then pushing fixed rates higher.”
This week’s trade war escalation seems to have taken BoC rate hikes off the table – and economists including BMO’s Robert Kavcic say the new threat to the economy could steer the central bank in a more dovish direction.
For now, few experts see rate cuts anytime soon – but it remains unclear how long tariffs will stay in place, and whether further US levies on Canada could be ahead.
If the economic damage on Canada proves worse than currently anticipated, could that bring central bank rate reductions back into the picture?
“On the other side could be that if this is going to cause a huge detriment to our economy and further weaken it, then the Bank of Canada will find themselves in a position where they have to stimulate and then cut,” Khaneka said. “So the variable might see a little bit of a brighter side to that equation.”
How damaging will the tariffs be?
The breakdown of trade negotiations between the US and Canada at the weekend caused the Trump administration to introduce 50% tariffs on a broad range of Canadian imports including dairy products, alcoholic beverages, building materials, consumer goods, and industrial and personal items.
Still, experts aren’t yet sounding the alarm about a possible huge shock to the Canadian economy. Servus chief economist Charles St-Arnaud (pictured below) said the latest measures are still less menacing than the huge blanket levies threatened by Trump at the beginning of last year.
“The hit is not going to be that big. It’s only 5% of our exports,” he told CMP. “There’ll be some headwinds for the labour market, probably some job losses, but I don’t think it’s going to be as bad as what we had in 2025 with the initial wave.
“I think the question is really: Where do we go from here? We’re back in uncertainty for businesses, uncertainty for households. We have the counter-tariffs that are going to have some impact, mostly on inflation. So how bad does it get? It’s clear it’s going to be a headwind on the Canadian economy in the short term.”
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