March 12, 2025

Another Rate Cut: What’s Next for the Canadian Economy?

The Bank of Canada has cut rates for the seventh consecutive time, bringing prime rate down to 4.95%. With the next scheduled announcement set for April 16, the big question is: what’s coming next?

Tariffs on the Horizon

A lot is riding on the upcoming tariff developments, especially as reciprocal tariffs are expected to kick in by April. If trade talks don’t show significant progress, many economists are predicting another 25 basis point rate cut at next month’s meeting. Currently, the markets are pricing in a 47% chance of a cut in April.

Inflation is the Wildcard

While rate cuts have been a response to slowing business activity, we also need to keep a close eye on inflation. If inflation picks up, the Bank of Canada may need to reverse course, potentially leading to a sharp tightening of policy.

What Happens if Tariffs Are Rolled Back?

If the tariffs are lifted in the coming months, there could be a quick boost to the Canadian economy. If the Bank of Canada’s overnight rate is already at or below the neutral rate of 2.75%, this could be the ideal moment for the Bank to pause and reassess the situation (i.e.rates would likely stop declining and plateau for some time before inching upwards).

Impact on Mortgage Rates

The spread between variable and fixed mortgage rates has been narrowing for some time and is now on the verge of inverting, with the variable rate mortgage becoming the more attractive option. This shift means that mortgage applicants may qualify for higher loan amounts with a variable rate, making it an opportune moment to renew, refinance, or purchase. However, this favorable environment may be temporary, especially if tariffs are rolled back, which could change the landscape quickly. Disclaimer: If tariffs do not get rolled back, expect the unexpected (emergency rates, quantitative easing, and more Trump trash-talk of annexing Canada).

Looking Ahead

Western Canada’s real estate and mortgage markets will be closely influenced by upcoming developments related to the tariffs and the Bank of Canada’s policies. Keep an eye on how these factors unfold in the coming weeks.

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