The Bank of Canada (BoC) reduced its policy rate to 3%, resulting in a corresponding drop in variable mortgage rates in Canada. While this move was widely anticipated amid cooling inflation and signs of renewed strength in the housing market, President Trump’s sweeping tariff measures added a layer of uncertainty for Canadian home prices. 

Economists aptly assess that Trump’s trade policies are not merely an economic nuisance. They mark a fundamental shift in global trade relations, where predictability is sacrificed for political optics. This unpredictable stance deepens economic uncertainty, with significant implications for the Canadian mortgage market.

If US President Trump imposes a 25% tariff on all Canadian imports, excluding energy, which is taxed at 10%, similar measures could be applied to Mexico and other allies. This will effectively trigger a full-scale trade war that defies the USMCA agreement he once championed. Canada may swiftly retaliate with counter-tariffs, setting the stage for economic turbulence that could reverberate through financial markets, including the Canadian mortgage sector.

BoC Policy Shift for Caution Amid Global Uncertainty

The Bank of Canada’s latest rate cut was accompanied by key takeaways that signalled a more accommodative stance on monetary policy:

• The end of quantitative tightening (QT) removes a consistent upward force on bond yields.
• Inflation expectations have normalized, giving the BoC more flexibility to respond to economic shocks.
• The Bank acknowledged that the widening gap between US and Canadian policy rates has only slightly impacted the exchange rate, estimating a 1% depreciation of the Canadian dollar.
• It warned that tariffs pose a “major uncertainty” as they reduce GDP and drive up prices, potentially placing upward inflationary pressures.

Will Lenders Align Mortgage Rates to Bond Market Trends?

Ordinarily, lower bond yields lead to reduced fixed mortgage rates. However, heightened economic uncertainty could prevent lenders from passing the full benefit to borrowers, keeping mortgage payments higher and complicating mortgage term selection. A historical comparison offers insight:

• When oil prices crashed in 2014, Government of Canada (GoC) bond yields dropped sharply, but mortgage rates didn’t decline as much because lenders increased their risk premiums.
• A similar pattern emerged in 2015 when the BoC cut rates twice to support the economy. However, lenders only passed on a fraction of the reduction to variable (VRM) and adjustable (ARM) mortgage holders.

In other words, while economic downturns typically lead to lower mortgage rates, extreme uncertainty may cause lenders to act cautiously. This caution means that while borrowers may anticipate declining mortgage rates, lenders prioritize capital security over aggressive rate reductions amid heightened market volatility.

How the Tariff War Could Influence the BoC’s Next Move

With its policy rate now at 3%, the Bank of Canada might lean toward further rate cuts, especially if the trade war leads to a significant slowdown in economic activity. Some analysts predict that a policy rate of 1.5% may be on the horizon if the situation escalates.

However, tariffs could lead to broad-based inflation as businesses adjust pricing to compensate for higher import costs. If inflation rises unexpectedly, the BoC could face a tricky balancing act: stimulating the economy while preventing an inflationary spiral.

Further complicating the landscape is the inherently political nature of these tariffs. An irrational view of bilateral trade lies at the heart of Trump’s trade philosophy. Despite Canada’s overall trade deficit when excluding the energy sectors—since the U.S. heavily depends on Canadian oil and gas—the selective imposition of a 25% tariff on most Canadian imports (contrasted with a 10% import tariff on energy) exposes a prioritization of political optics over economic logic. 

Experts warn that this unpredictable approach, including unproven claims about fentanyl smuggling, large numbers of illegal immigrants crossing into the United States and musings on annexation, is eroding economic confidence. As Martin Wolf succinctly states, “predictability is the victim of Trump’s tariff threats.” This environment may force the BoC to consider further rate cuts while compelling lenders to remain cautious in their mortgage pricing strategies.

Will the US Economy Weather the Storm?

While Canada faces a heavier economic burden from these tariff threats, the United States is not immune to their fallout.

• Inflation remains a concern in the US, meaning price increases driven by tariffs could exacerbate existing pressures.
• The US stock market has been on a prolonged bull run, with valuations potentially vulnerable to economic shocks.
• Currently, at 6% of GDP, a sizeable federal deficit limits fiscal manoeuvrability, leaving less fiscal room to mitigate trade-related economic headwinds and hampering economic growth.

Trump’s tariffs on the US’s most valuable trading partners, Canada, Mexico, and China, are contributing to an atmosphere of uncertainty that may ripple across financial markets on both sides of the border. This may increase the likelihood of supply chain disruptions and retaliatory measures.

Could Canadian Economic Resilience be a Potential Silver Lining?

While the immediate impact of the tariffs is negative, Canada has an opportunity to counterbalance these effects by reducing interprovincial trade barriers, which economists estimate act as a 21% internal tariff.

Canada could offset the GDP losses associated with US tariffs by implementing long-overdue reforms to enhance domestic trade efficiency. BoC Deputy Governor Carolyn Rogers previously cited domestic productivity as a key weakness—perhaps this crisis will catalyze long-term economic improvements.Despite the immediate negative impacts of the tariffs, Canada may find opportunities to offset some of the economic damage. In the longer term, structural reforms spurred by this crisis could strengthen domestic productivity and economic resilience.

Mortgage Holders Should Stay Vigilant

These developments underscore the importance of trusted and licensed mortgage advice for Canadians with mortgages or those considering homeownership. While the BoC appears poised to cut rates further, mortgage lenders might not entirely pass on these reductions due to heightened economic uncertainty.

For now, prospective buyers and homeowners alike should monitor mortgage rate forecasts carefully, assess fixed vs. variable rate options, and consider locking in mortgage rates if volatility persists. In an uncertain economic landscape, a well-planned strategy through your mortgage broker is more crucial than ever.

Trump’s trade policies continue to sow uncertainty, targeting specific sectors with seemingly arbitrary tariff rates and fueling politically charged narratives – increasing borrowing costs. The actual cost may be measured in lost trade and the long-term erosion of economic growth and confidence. Prospective homebuyers and current mortgage holders alike must stay informed and adaptable in this turbulent environment. Contact a nesto mortgage expert today to lock in your savings with a well-planned mortgage strategy.

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