March 2025 Rate Cut from Bank of Canada

Latest News Trish Pigott 12 Mar

Bank of Canada Cuts Policy Rate By 25 BPs
The Bank of Canada (BoC) reduced the overnight rate by 25 basis points this morning, bringing the policy rate down to 2.75%, within the neutral range of 2.25%—2.75%. Tariff tremors have already led to a decline in consumer confidence and spending, a weakening labour market, and a decline in business investment. Compound that with falling population growth, and you see why the Governing Council took the overnight rate down again even though they state that monetary policy cannot offset the impacts of a trade war.

Trade wars lead to higher prices and slower growth. The rise in prices causes consumers to tighten their belts, concerned about the impact of tariffs on their income and investments. Today, there is a 25% tariff on steel and aluminum exports to the US. This impacts Canada the most as it supplies roughly 80% of US aluminum demand. The EU introduced retaliatory tariffs on US goods in response. Canada added to its retaliation. Recent data suggest the US economy is slowing.

Monetary policy remains restrictive as the real overnight rate (2.75% minus the headline inflation rate) is 85 bps, up from the historical average of 60 bps. Five-year Government of Canada bond yields increased on the news to 2.65% compared to 4.05% in the US. The Federal Reserve is not expected to cut rates when it meets again this month.

Despite relatively strong GDP growth in Canada in the second half of last year, home sales and hiring began to slow in late January due to tariff threats, and more tariffs are yet to come. On March 20, China is expected to impose 100% retaliatory tariffs on Canadian canola oil, while pork and seafood will face a 25% levy. The Chinese tariffs are a push-back against Canada for imposing a 100% levy on electric cars from China and  25% on steel and aluminum.

On April 2, the US announced it will impose reciprocal tariffs on nations that have levied tariffs on US goods. President Trump has also said he is considering imposing retaliatory tariffs on Canadian dairy and lumber.

“We’re now facing a new crisis. The economic impact could be severe depending on the extent and duration of new US tariffs,” Macklem said in his prepared remarks.

Macklem called the uncertainty of the tariff dispute “pervasive” and said that it was “already causing harm.” Officials said the “continuously changing” US tariff threat was hitting consumers’ spending intentions and limiting businesses’ plans to hire and invest.

At the same time, Macklem said the bank “will proceed carefully with any further changes” to borrowing costs, and officials would “need to assess both the upward pressures on inflation from higher costs and the downward pressures from weaker demand.”

Bottom Line

These are uncertain times. The US is determined to impose worldwide tariffs, disproportionately hitting Canada, Mexico, and China, the US’s top trading partners. This is a misguided neo-Mercantilist policy. Mercantilism assumes that the global economic pie is fixed, so if one country prospers, another must fail. This idea of a zero-sum game was debunked in the 18th century by Adam Smith and others who showed that if countries have a competitive advantage in various products and services, all are better off by producing and trading those products with the rest of the world. It is not a zero-sum game. The economic pie grows with trade. This was the idea behind globalization and the USMCA free trade agreement.

Given Canada’s vulnerability to tariffs, the economy will suffer more than the US, which has a relatively closed economy (where exports are a small proportion of GDP). Prices will rise depending on the duration and size of the coming tariffs, but mitigating the inflation will be the weakness in economic activity. Stagflation, a buzz-word in the 1970s, is back in the lexicon. We expect the BoC to continue cutting the policy rate in 25-bps increments until it reaches 2.25% this June, triggering a rebound in home sales. Layoffs and spending cuts will dampen sentiment, but lower interest rates will bring buyers off the sidelines.

Tariffs and Your Mortgage

General Trish Pigott 6 Mar

UPDATE 3/6/25: Just as I was about to send this apparently Trump has paused the tariffs to Mexico and now Canada until April 2.  Good grief….how does anyone keep up with this…either way here are some tips below if he is back at it next month on how to handle your mortgage and potentially take advantage of falling rates.

On Tuesday, March 4, 2025 Trump has imposed tariffs of 25% on goods coming from Mexico and Canada, 10% on Canadian energy, and an additional 10% on goods from China and has since already scaled back on 3 automotive suppliers.  Canada has come back with retaliatory tariffs and now we end up in a trade war with the US. There is so much debacle with the entire Trump administration, it’s mind blowing that this is where we are in todays day and age.

Over the last few days we’ve seen a wild ride in the stock markets and as a result the bond market has fallen which directly affects fixed mortgage rates.  We have not seen the bond market this low since mid 2022.  We have also had multiple economists report yesterday and today that the Bank of Canada will respond with additional rate cuts to the overnight target rate (which affects the Prime rate) and now expected that we will see 4 more cuts by July of this year with the first one next week.

How does this affect mortgage holders; 

  • New Mortgage Borrowers:  This will allow you to qualify for slightly larger mortgages and give lower payments in either a Variable Rate Mortgage or Fixed Rate Mortgage as rates drop
  • Existing Variable Rate Mortgage Borrowers: This will lower your mortgage rate when Prime comes down and in some cases lower mortgage payments.
  • Existing Fixed Rate Mortgage Borrowers: Potential opportunity to reduce your current rate by either Refinancing your mortgage or Switching your mortgage to a new lender at a lower interest rate improving your cash flow.
  • Although lower mortgage rates are usually a positive thing for home owners, buyers and the real estate market in general, this is a very difficult time for our economy.  There are so many unknowns and we do not want to repeat what happened during the pandemic years with rock bottom rates and then a rate spike.
Reminders on moving forward: 
  • Although lower rates generally equal lower payments, this is a time to build up your savings and not to overspend
  • Even though home buyers may qualify for more, be very aware of not over extending to protect your financial future
  • If you are Refinancing or Switching to get a lower rate, try and leave your current payment the same so that you are paying your mortgage and interest down that much faster
  • Be reminded that during the pandemic, many people maxed out their budgets with low mortgage payments and had excessive cash which was used to overspend in many cases in housing and consumer spending in general.  Be very careful not to get caught in that trap.
  • This drove up inflation substantially which ultimately caused the Bank of Government to increase rates in a short period of time putting a massive strain on many households financially due to rising mortgage payments

So in summary, while we may see lower rates over the course of this year, be very diligent with your spending habits right now as we see how everything will unfold with our borders and overall economy.

Now more than ever is the time to get your finances in order to prepare and plan. To get started and put a plan in place, contact me directly at 604-729-7940.

We are watching this daily and I will have an update out next week with the Bank of Canada’s next rate announcement on March 12, 2025.