The Bank of Canada lowered its key interest rate by 25 basis-point cut, bringing it down to 3%. This smaller cut follows two consecutive 50 basis-point reductions late last year.
This move comes amid several competing pressures, including inflation concerns, trade risks, and a slowing housing sector.
In addition, the continued threats of a 25% tariff implemented on Canadian exports as early as February 1st is bearing heavier on the minds of economy-watchers.
"The potential for a trade conflict triggered by new US tariffs on Canadian exports is a major uncertainty," said Governor Tiff Macklem said during the morning announcement on Jan. 29. “This could be very disruptive to the Canadian economy and is clouding the economic outlook.”
Here’s what the bank’s recent decision could mean for Canadians and the broader economy.
KEY FINDINGS
- The Bank of Canada has reduced its key interest rate by 25 basis points to 3%, following two larger cuts of 50 basis points in late 2024.
- Inflation has eased slightly, falling to 1.8% in December due to temporary factors like tax relief measures. However, core inflation remains elevated above 3%.
- Ongoing U.S. tariff threats, including a potential 25% tariff on Canadian goods, pose serious risks to key export sectors like energy and manufacturing.
- Homeowners stand to benefit from lower monthly payments, with variable rate mortgage holders able to save up to approximately $15 per $100,000 of mortgage.
Inflation and trade tensions
Inflation dropped to 1.8% in December, down slightly from 1.9% in November. While this appears like good news, Shelly Kaushik, senior economist at BMO Capital Markets, points out that temporary factors, such as the federal government’s GST/HST holiday, largely contributed to December’s drop, while underlying core inflation remains strong.
“The three-month trend in the Bank’s two preferred measures of core inflation have accelerated to above 3% in recent months,” says Kaushik. “For now, we’re expecting inflation to be steady in the low 2% range through 2025.”
Still, the Bank appears to prioritize preventing further economic slowdowns amid mounting challenges, including the shadow of potential U.S. tariffs, by introducing rate cuts.
President Trump has reiterated tariff threats on Canadian goods, which could start as early as February 1st. If enacted, this could disrupt key export sectors such as energy and manufacturing while also exacerbating uncertainty. According to Stephen Tapp, chief economist at the Canadian Chamber of Commerce, a 25% tariff applied across the board on all U.S. imports could push Canada’s economy into recession by the middle of 2025.
Kaushik suggests that the Bank’s decision to cut rates further reflects its acknowledgment of these risks.
“Ultimately, while I wouldn’t entirely rule out the possibility of the BoC hiking rates, it’s more likely that it would be cutting rates further,” she adds.
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Broader economic challenges
The Canadian economy faces vulnerabilities that could complicate the recovery, Kaushik points out. The country’s energy sector—its largest export to the U.S.—is particularly at risk if American tariffs target oil and gas.
“Canada’s largest export to the U.S. is energy, and a broad 25% tariff would have the biggest impact there—though fewer substitutes for U.S. refineries means that the U.S. is more likely to have carve-outs for Canadian energy,” Kaushik explains.
Manufacturing is another weak spot, she adds. Sectors like auto manufacturing, which rely heavily on cross-border supply chains, may see rising costs and slowing demand if trade disputes escalate. Businesses in Central and Atlantic Canada could also struggle to absorb higher costs, especially if they’re not granted exemptions from tariffs.
Adding to the uncertainty, there’s little clarity on how such trade disputes might unfold or their full economic impact.
“We don’t know what new tariffs will be imposed, when or how long they will last. We don’t know the scope of retaliatory measures or what fiscal supports will be provided,” said Macklem.
“And even when we know more about what is going to happen, it will still be difficult to be precise about the economic impacts because we have little experience with tariffs of the magnitude being proposed,” he added.
These unknowns leave Canadian industries bracing for disruption as they face rising costs and uncertainty in planning for the future.
Meanwhile, the Canadian dollar has been losing value against the U.S. dollar. A weaker loonie can make imported goods more expensive, which could increase inflation even as the Bank of Canada moves to support economic growth through rate cuts.
Impact on housing and mortgage markets
For homeowners and prospective buyers, the interest rate cut is expected to bring modest benefits, particularly for those with variable-rate mortgages. Victor Tran, a housing and mortgage expert with RATESDOTCA, breaks down the numbers.
For adjustable, variable-rate mortgage holders, every 25 basis-point reduction translates to roughly a $15 drop in monthly payments per $100,000 of mortgage. While helpful, the effects have been gradual. This does not apply to fixed-rate mortgages.
The housing market has shown signs of stabilization as rates have declined, with Tran pointing out that “housing sales activity is ticking up, but there's still room for growth.”
According to data from the Canadian Real Estate Association (CREA) , national home sales dipped by 5.8% between November and December 2024 but remain 13% higher than where they were in May 2024, just before the Bank of Canada began cutting interest rates.
The fourth quarter of 2024 recorded a 10% rise in sales from the previous quarter, making it one of the stronger periods in the past two decades, outside of the pandemic era. Despite a modest month-over-month decline in new listings, the MLS® Home Price Index (HPI) shows a small uptick of 0.3%, and a yearly average price increase of 2.5% suggests a steadier market.
However, Kaushik notes that regional differences remain a critical factor in shaping market dynamics. For example, tight inventory is pushing up competition in markets like Quebec, while Toronto’s condo market continues to face headwinds from oversupply.
“We’re expecting this ‘slow and steady’ pace to continue—assuming no major disruptions to the economy—but regional divergence should also remain a key theme for the year,” says Kaushik.
Despite the immediate benefits for affordability, buyers remain cautious. Factors like economic uncertainty, fewer new immigrants entering the market, and the evolving tariff situation are tempering demand in the short term.
Tran adds, “There’s pent-up demand in the market. While housing momentum is likely to accelerate at some point in the year, the exact tipping point remains unpredictable.”
Read next: Is the double rate cut announced by the Bank of Canada enough to revive the housing market?
What’s next?
The Bank of Canada is trying to balance keeping inflation low and protecting the economy from trade problems. Kaushik thinks Governor Tiff Macklem is being careful, recognizing ongoing risks but also leaving room for more rate cuts later this year.
For Kaushik, this gradual approach makes sense, given the lingering uncertainty. But large unknowns loom on the horizon—especially surrounding tariffs and their fallout. The Bank’s next steps will likely depend on how the situation with the U.S. unfolds and whether economic data supports further action.
“If the Canadian government imposes retaliatory tariffs, that might raise some prices for Canadian consumers, but so far it looks like any Canadian response would be more targeted,” says Kaushik. “So, it’s really the growth-dampening U.S. tariffs that would likely have the bigger impact."
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