Bank of Canada Cuts Policy Rate by Quarter Point

The Bank of Canada (BoC) has taken decisive action in response to the escalating trade tensions between Canada and the United States. US President Donald Trump’s executive order imposed a 25% tariff on all non-energy imports from Canada and a 10% tariff on energy imports, citing national security concerns. In response to the US tariffs on Canadian imports, the BoC has announced a quarter-point rate cut to mitigate the economic fallout.

This move is expected to have far-reaching effects on the Canadian economy, affecting trade, employment, inflation, the loonie and the housing market. Today’s BoC 25 basis rate cut adjusts the target for the overnight policy rate down to 2.75%, bringing the nation’s prime rate to 4.95%, cushioning the Canadian economy from the disruptive impact of these tariffs.

The Bank of Canada’s policy rate yesterday stood at 3%, which the Bank considered the upper end of its neutral range—meaning it neither restricted nor encouraged economic demand. The Bank’s policy rate would not have been considered stimulative until it reached around 2%, prompting expectations of additional rate cuts until the policy rate approached this level. Historically, reducing the policy rate to 2% or lower aligned with the Bank of Canada’s typical approach. Indeed, in each of the five previous cycles of rate reductions, the Bank had consistently reduced its policy rate to this level or even lower.

Many Canadian mortgage holders face a renewal of the ultra-low mortgage rate they had secured during the pandemic. With significantly higher rates prevailing at renewal, these borrowers will experience a noticeable payment increase. Further rate cuts by the Bank of Canada are essential in alleviating this financial strain.

Tiff Macklem Leadership Amid Crisis

BoC Governor Tiff Macklem has had to make some of the most consequential decisions of any Canadian central banker in history. He began his tenure during the COVID-19 crisis and is now at the forefront of an economic battle against US President Donald Trump’s aggressive trade policies.

After six consecutive rate cuts, there had been speculation that the BoC would pause its easing cycle. However, the tariff chaos has forced policymakers to act swiftly, a decision that was not taken lightly. Recent data from Statistics Canada showed that GDP grew 1.6% in Q4 2024, exceeding expectations. Exports and imports surged in January as businesses rushed to stockpile goods in anticipation of trade restrictions. Even labour productivity showed signs of life. However, policymakers feared that this momentum would be short-lived as the effects of US tariffs set in.

Faster economic growth naturally generates price pressures. While headline inflation has remained within the BoC’s 2% target range since August, core inflation measures have remained stubbornly high at the upper end of the bank’s 1–3% control range. Economists warned that core inflation stickiness and the weakness of the Canadian dollar might have justified delaying further cuts. Initially, the bond futures market and economists had predicted that the BoC would hold steady in March before resuming rate cuts in April, changed from a less than 50% probability in February to an 80% probability of a rate cut this week. 

Economic Impact of US Tariffs on Canada

The newly imposed tariffs pose a serious risk to Canada’s economic stability, potentially trapping the country into a moderate recession. Exports to the US represent approximately 80% of Canada’s GDP, and with trade barriers in place, key sectors will suffer disruptions.

Trade and GDP Growth

The manufacturing sector will be among the hardest hit, particularly industries reliant on cross-border trade, such as automotive, machinery, and metals. The tariffs will slow production and disrupt supply chains, affecting large corporations and small- and mid-sized enterprises (SMEs). 

The Bank of Canada has estimated that these tariffs could reduce GDP growth by 1.5% to 2.5% in 2025, pushing the economy closer to contraction, with GDP growth now projected to slow from 2% to 0.5%. However, with companies having stockpiled goods to hedge against trade restrictions, this momentum is expected to fade as supply chains become strained and investment hesitations take hold.

The Canadian Federation of Independent Business (CFIB) reported that small business sentiment had deteriorated significantly in February, with many businesses anticipating price hikes in response to rising import costs. CFIB’s monthly survey found that respondents planned to increase prices by an average of 3.1% over the next 12 months, the highest level recorded since April 2024. The anticipation of rising costs underscores the inflationary risks associated with the ongoing trade dispute.

Inflation and Consumer Spending

Inflation is expected to rise by 0.5% to 1% in 2025 as the higher costs of imported goods pass through to consumers. Higher costs could further strain household budgets, particularly as consumer confidence declines and discretionary spending weakens. The increased cost of living and job market uncertainty will likely result in reduced consumer demand, further dampening economic activity. Moreover, consumer and business inflation expectations have returned to historically normal ranges, giving the Bank of Canada greater flexibility to adopt a more accommodative monetary stance.

According to economist David Rosenberg, the recent period of heightened uncertainty led businesses to postpone capital expenditure plans, drove individuals to increase their personal savings rates, and triggered risk-averse behaviours in financial markets, notably causing credit spreads to widen. When credit spreads widened, lender funding costs increased, weakening the typical correlation between fixed mortgage rates and Government of Canada bond yields. Additionally, the Bank of Canada’s monetary policy tools were notably more effective at managing inflation than deflation, a concern that had emerged at that time. Consequently, the Bank preferred risking slightly higher inflation over too little inflation.

Although headline inflation has remained within the BoC’s 2% target range since mid-2024, underlying core inflation measures have remained persistently high, sitting at the upper end of the BoC’s 1%–3% control range. Analysts caution that the inflation battle is far from over, particularly as businesses anticipate price hikes to offset higher import costs.

Canadian Dollar and Market Reactions

The Canadian dollar has already experienced depreciation in response to the new trade environment, reflecting investor concerns over Canada’s economic prospects. Foreign currency analysts forecast it could reach between 64 and 69 cents USD by Q3 2025. A weaker currency could provide some relief to exporters by making Canadian goods more competitive in global markets. However, the flip side is that import costs will rise, adding to inflationary pressures and making essential goods more expensive for consumers.

Financial markets have reacted negatively to the uncertainty. As concerns over the trade war escalated, the S&P/TSX futures index fell by 1% in early March. Investors remain cautious, with many expecting additional rate cuts later in the year if economic conditions continue to deteriorate. 

Additionally, the BoC’s decision was influenced by recent employment data showing that Canada’s economy added only 1,100 jobs in February, leaving the unemployment rate unchanged at 6.6%. The result came in significantly below the market expectation of 20,000 jobs and contrasted sharply with the robust employment growth observed over the previous three months. Detailed employment data further underscored the disappointing trend. Full-time positions decreased by 19,700, although part-time positions increased by 20,800. Additionally, average hours worked fell by 1.3%, primarily due to adverse weather conditions. Moreover, the growth in population, at 47,000 individuals, significantly outpaced the rate of new job creation.

Impact on the Real Estate Market

The mortgage and housing markets also feel the effects of the trade war. While the BoC’s rate cut will help ease borrowing costs, broader economic uncertainty could weigh on homebuyer confidence and demand.

How Bank of Canada Rate Changes Affect Your Mortgage Payments

For example, if you have a $500,000 mortgage secured at nesto’s 5-year variable low rate of , your monthly payment would be $2,680.78. On every $100,000 balance, your mortgage payment will be $536.16, while your stress-tested mortgage payment will be $653.51.

_{Common mortgage amounts and corresponding mortgage payments on nesto’s 5-year variable low rate of on a 25-year amortization. Qualifying mortgage payment affects all new mortgages, which need to be qualified on stress-tested payment based on the contract rate plus 2%.}

March 2024 vs. March 2025: What’s Different?

How Has Housing Affordability Changed in the Past Year? Renting vs. Owning

Today, Canada’s benchmark home price is $709,200, while a year ago, it was $708,700, which has increased by 0.1%. However, the lowest 5-year variable mortgage rate at nesto has decreased from 5.90% a year ago to today. These changes mean that Canada’s average monthly mortgage payment has decreased from $3,618.36¹ to $3,041.93². This implies that nationally, the average insurable mortgage payment decreased by 15.93% from a year ago. In comparison, during that same period, Canada’s average national rent decreased by 2.7% from $2,144.38 to $2,088, which in dollars is $56.38 year-over-year.

TL; DR— Canada‘s monthly mortgage payment decreased by 15.93%. Meanwhile, average home prices increased by 0.1%, and average national rents have decreased by 2.7%. In dollars, mortgage payments have decreased by $576.43, average home prices have increased by $500, and average national rents have decreased by $56.38.

_{*1 and 2: Values for mortgage payments calculated based on nesto’s variable rate over a 25-year amortization period with a 20% downpayment using the average/benchmark home price in the stated month as reported by CREA for the location.}

Mortgage Rate Adjustments

However, Big Banks have lowered their lowest advertised fixed mortgage rates as bond yields established themselves in a lower trading range. Fixed mortgage rates do not directly respond to the Bank of Canada’s policy rate changes. Instead, they are influenced primarily by Government of Canada bond yields, which factor in expected movements in the Bank’s policy rate and other determinants, including the direction of US Treasury yields.

Bond-market investors had already factored in a Bank of Canada rate cut of 0.25% for this week. Consequently, the Government of Canada’s bond yields remained relatively stable since the onset of the initial tariff shock. However, this could change if the Bank’s accompanying commentary does not align with market expectations. Nevertheless, ongoing trade-war uncertainties are anticipated to sustain downward pressure on bond yields and, by extension, fixed mortgage rates.

Over the shorter term, fixed mortgage rates may decline in response to falling bond yields, offering some relief to new homebuyers and those looking to refinance. Variable-rate mortgage (VRM) holders will see immediate benefits from the BoC’s rate cut, with more of their monthly payments going to repay their principal mortgage balance. While adjustable-rate mortgage (ARM) holders will see their monthly payments lower by $13 to $15 for each $100,000 mortgage balance with this rate cut, though future rate movements will depend on how inflation evolves in the coming months.

Housing Market Sentiment

Home sales have already declined by almost 28% in the Greater Toronto Area (GTA) between January and February. They are expected to soften further as economic uncertainty deters buyers from making significant financial commitments. Home price growth in major markets such as Toronto and Vancouver may continue to slow or decline as demand weakens. Additionally, the construction sector could face challenges as higher costs for building materials—resulting from increased tariffs—make new housing projects more expensive.

Mortgage Strategies for Homebuyers

Given the evolving landscape, homebuyers should consider locking in lower fixed rates while further BoC cuts are anticipated. Homeowners approaching mortgage renewal should take advantage of the new mortgage rules. Or explore refinancing opportunities for debt consolidation to lower their borrowing costs. First-time buyers should seek professional mortgage advice to assess their financial readiness and ensure they make decisions best suited to their unique circumstances. Make the best of this spring lending season, as it might usher in extraordinary opportunities for lower home prices paired with low mortgage rates, such as those seen during March and April 2020. However, tariff chaos may cast a shadow on credit liquidity.

Secure Your Financial Future Before It’s Too Late

The economic landscape is shifting rapidly, and uncertainty is high. With potential further tariff escalations looming, the economic outlook remains volatile. The US administration has signalled that additional tariffs on critical industries such as steel, aluminum, and lumber may be on the horizon. The trade war could intensify if Canada introduces additional countermeasures, leading to more pronounced economic consequences.

Now is the time to act. Mortgage rates are still relatively low, but with ongoing economic uncertainty, waiting too long could mean higher costs down the road. Whether you’re purchasing or building a home, refinancing an existing mortgage, or up for renewal, securing a competitive rate now can help you avoid financial strain later. Gain peace of mind by contacting nesto mortgage experts today to develop a tailored mortgage strategy and lock in the best mortgage rate.

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