Are Canadian interest rates about to nosedive?

Tariffs are off the table for now – but both fixed and variable rates could still tumble

Canada and the US stepped back from the brink of a historic trade war yesterday evening as Donald Trump agreed to pause huge tariffs on Canadian imports for 30 days – but the threat has far from gone.

The measures would have represented what RBC economists described as Canada’s biggest trade shock for nearly a century, and while Trump has put those levies on hold, Canadians are continuing to confront the new economic reality of a potentially hostile southern neighbour.

The threat of those 25% charges on all Canadian imports to the US (excluding energy, which would be levied at 10%) is still hanging over the Canadian economy and would potentially see economic growth wiped out for up to three years, economists Frances Donald and Nathan Janzen wrote.

That would potentially lead to a jump in unemployment and even further damage to the loonie, which bounced back on Monday evening after Canada’s prime minister announced a deal had been struck with Trump.

Unsurprisingly, the outlook for the Bank of Canada is also evolving rapidly. The central bank’s policy rate was already on its way to about 2% before the US tariff threats loomed into view – but it would probably fall even further, Donald and Janzen said, if Trump’s measures begin to pummel Canada’s economy.

National Bank of Canada (NBC) analysts even said the central bank could be justified in making an emergency oversized rate cut between now and its next meeting to mitigate the impact of the US tariffs.

Five-year Government of Canada bond yields, which lead fixed mortgage rates in Canada, have also taken a plunge during the past two weeks, slipping even further over the weekend and slumped below 2.74% at time of writing.

Don’t expect a housing market boom despite lower rates

But while those developments mean dramatically lower borrowing costs could be down the line for Canadian homebuyers, wider trepidation about potential economic chaos and a deep recession is also muting buyer confidence.

Justin Prasad (pictured top), financial advisor at BlueShore Financial, told Canadian Mortgage Professional the political strife was weighing against consumer sentiment amid growing concerns about the economy’s future.

“What we saw in 2016 when Trump got elected was that a lot of clients were kind of nervous about that. They didn’t want to invest in the market or make any major decisions,” he said. “So you’ve seen some of that anxiety now creep up, and that’s becoming more and more every day.

“There are still a lot of headwinds out there. Yes, it will be a better spring housing market than 2024 but I wouldn’t go into it thinking that thinks are back to normal. I do think that it’s going to be a bit sluggish in certain parts, certain types of housing like apartments, townhouses.”

Still, for those who are ready to push ahead with a move, the question of whether a fixed or variable rate is the right option is a difficult one to answer.

While inflationary pressure might arise from potential tariffs, their overall impact on the economy – and the unemployment rate – would probably push the Bank of Canada to cut further, Prasad said. That would boost variable rate prospects, although fixed rates are also likely to tumble even more.

“Had you asked me a week and a half ago, two weeks ago, the flavour on the street was to go with the variable because there really was no movement on fixed rates. They’d really been holding steady since September, October,” he said. “But if you look at where the bond yields are going the last three days, that tells me that fixed rates are probably going to come down a bit over the next couple of weeks.

“If you’re getting a mortgage and in your mind you think things are going to get worse, stick with a variable. If you want to know what your costs and mortgage rates are going to be over the next five years, go fixed rate. I’d look at it from that perspective versus playing the rate game.”

How long would a trade war last?

While Monday’s announcement put Trump’s threats on pause, they’re by no means on the back burner, with Canada given 30 days to shore up border security.

CIBC’s Avery Shenfeld said in a note Monday that he expected a potential Canada-US trade war would be a short-lived affair. “Our base case forecast calls for cooler heads to prevail and trade hostilities ending after Q2,” he said.

But the bank also raised the possibility of a prolonged trade spat being the “new reality” of relations between Canada and the US. “We are hopeful that Canada should be able to take enough steps to convince the White House that it is taking border security seriously, making this a very short trade war,” Shenfeld wrote.

“A temporary tariff would be a short-lived shock and with a negotiated long-term settlement plus policy support, we could get through without too much lasting damage. While we hope for that outcome, there is a material risk that we may settle with just a lower tariff.”

All that points to a “tough road” ahead for the Canadian economy, he added. “Canada gaining an exemption to this and future tariffs will depend on how they hurt both the US economy and American political economy,” he said.

Source: Canadian Mortgage Professional