The central bank is expected to slash rates today and keep further reductions on the table as trade uncertainty rumbles on
The Bank of Canada is preparing to make an interest rate decision on Wednesday that’s suddenly become a momentous one, with the Canadian economy lurching in recent weeks into one of the most seismic challenges it’s ever faced.
Donald Trump’s decision to launch a trade war last week threatened some of the biggest upheaval in the history of the Canadian economy, and the prospect of a lengthy trade spat with the US continues to hover despite the president’s move to pare back many of those restrictions in the following days.
Canada’s central bank had been widely expected to hit pause on interest rate cuts after January’s decision, which marked a sixth consecutive reduction in a row and took its benchmark rate to 3% – a full two percentage points below its midyear level in 2024.
Trump’s tariffs a gamechanger for interest rate outlook
But Trump’s provocations have transformed that picture. Not only is the Bank now expected to slash rates by a further 25 basis points on Wednesday – it’s also projected to keep more cuts on the table if the trade dispute with the US continues to rumble on.
Bank of Montreal (BMO) economist Sal Guatieri said the central bank could ultimately be compelled to slice rates as low as 1.5% if a trade war with the US “torpedoes” the Canadian economy.
That would mark a “huge drop,” RATESDOTCA mortgage and real estate expert Victor Tran (pictured top) told Canadian Mortgage Professional – and even if rates don’t fall that dramatically, any further reductions would be good news for homeowners and buyers alike.
“[That means] huge relief for anyone entering the housing market, especially for anyone that has a home,” he said. “Mortgage renewals are a hot topic this year and for next year too, with a significant amount of homeowners having to renew their mortgage contract for higher rates than what they signed for.
“So it’s going to be a huge relief for those homeowners knowing that their payments are not going to be as high and severe as they initially planned for.”
Rate hikes by the Bank of Canada in 2022 and 2023 to combat inflation helped pour cold water over a red-hot housing market, pushing many buyers to the sidelines as borrowing costs spiked in line with higher rates.
But even though rates have dropped in recent months, and could be on the way even lower, don’t expect a housing market surge to materialize anytime soon.
That’s because there’s still plenty of unease about how the political climate could damage the economy in the months ahead, particularly if those trade concerns linger.
What’s more, affordability remains a huge hurdle for many buyers to overcome even despite lower interest rates.
“There’s so much uncertainty out there and political instability that a lot of people don’t want to make moves and understandably so,” Tran said. “The slightly lower rates help a little bit – but house prices are still very expensive compared to what they were, say, five years ago.
“Five years ago we had super-low rates, some of the lowest rates we’d seen historically. But prices were a lot [lower]. Prices have come down a little bit, but not really enough to spur a lot of buyers to the market. They’re still pretty high, a little bit more than double what they were five years ago. And it’s understandable that a lot of buyers are [showing] extra caution, especially with a deeper recession that’s potentially around the corner.”
Will tariff wars plunge North American economies into recession?
Trump appeared unwilling at the weekend to rule out the prospect of a US recession triggered by his flurry of tariffs, while economists including former Bank of Canada governor Stephen Poloz have highlighted the potentially huge impact a trade war could have on an already sluggish Canadian economy.
The stock market has nosedived, meanwhile, during the past week amid growing fears over the likely economic repercussions of a lengthy trade spat.
“I think a lot of people are just trying to hunker down and prepare for the worst,” Tran said. “And it’s just not a good time to spend a lot of money on a house – especially if they don’t truly need it right now.
“If they can continue renting or living with family then it’s not the end of the world. So a lot of buyers are just waiting for the absolute perfect opportunity but even if they do find the right house, it’s still huge. It’s a big move. It’s a very scary move.”
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