The Bank of Canada has lowered its overnight interest rate by 25 basis point to 2.75%, marking its second consecutive cut this year, and seventh since the rate cuts began in June 2024. This latest cut comes amidst increasing economic challenges.
The U.S. has put tariffs on more than 60% of Canada’s imported goods, like machinery and clothing, with businesses facing higher costs and possible job losses.
For now, goods under the U.S.-Mexico-Canada Agreement (CUSMA), including automotive products, are confirmed to last until April 2, 2025, offering temporary relief. Even so, there’s still a lot of uncertainty about the rising cost of consumer goods, and the overall economic impact.
“Looking ahead, the trade conflict with the United States can be expected to weigh on economic activity, while also increasing prices and inflation,” said Governor Tiff Macklem during the morning announcement on March 12.
By reducing rates, the Bank of Canada aims to cushion the economy against a potential recession, stabilizing vulnerable industries, and supporting a path to recovery. Here’s what this latest move 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 2.75%, marking its second consecutive cut this year, in an effort to address economic pressures.
- Newly imposed U.S. tariffs on Canadian exports are straining key industries, creating economic uncertainty, and risking job losses.
- Mortgage holders up for renewal and those with adjustable variable rate mortgages stand to benefit from reduced rates.Adjustable variable-rate mortgage holders will pay approximately $15 less in monthly payments for every $100,000 of mortgage. Fixed rates have also declined as bond yields fall amid market uncertainty.
- The housing market response is mixed, with greater affordability in certain markets such as the Toronto condo market, but tight inventory for detached homes in high-demand areas like Vancouver is continuing to challenge buyers.
Why is Bank of Canada lowering its key interest rate?
The Bank of Canada is cutting its key interest rate to help the economy and protect jobs during tough times. Here’s what’s behind this decision:
Trade tensions with the U.S.
Since November 2024, President Trump has been threatening to slap a 25% tax on Canadian goods coming into the U.S. This has caused worries about how it will affect Canada's economy, impacting businesses that rely on American business. The tariffs apply to many items like machinery, vehicles, grains, dairy, and clothing.
On March 4, tariffs on Canadian imports, including the 25% tax on goods and a 10% tax on energy products like oil and natural gas, came into effect. Two days later, President Trump announced a temporary break from some of these tariffs for goods that fall under the United States-Mexico-Canada Agreement (CUSMA).
On March 7, President Trump proposed a 250% tariff on Canadian dairy and lumber imports, citing claims of unfair trade practices.
U.S. Commerce Secretary Howard Lutnick walked back the tariffs again, announcing that they’ll be on hold until April 2, to align with broader tariff reviews, including the goods under CUSMA. This delay provides temporary relief but leaves Canadian industries bracing for potential impacts.
Overall, the tariffs, along with the uncertainty of rapidly changing tariffs and retaliatory tariffs, could lead to lower production, job losses, and slower economic growth for Canada.
Sal Guatieri, director and senior economist at BMO Capital Markets, notes that the economy could contract “for a couple of quarters” as a result, with “the jobless rate potentially rising to 8% by year-end.”
Read more: How will US tariffs affect your auto and home insurance?
Balancing inflation and growth
Core inflation, excluding food and energy, is currently within the Bank of Canada’s 1-3% target range but is projected to climb to 2.5% in March as the tax break expires, according to Macklem.
This shift highlights potential instability, shifting attention to growth risks.
Guatieri cautions that right now "the likelihood that a trade war with the U.S. will raise the jobless rate materially should overshadow any inflation concerns."
Read next: BoC cuts policy rate by 25 basis points amid trade tensions: what does this mean for Canadians?
A 0.25% rate cut could lower payments by $14 per $100K
When the Bank of Canada cuts its key interest rate, borrowing becomes more affordable. Here’s how:
Mortgages:
- Fixed rates: These are directly influenced by to the Government of Canada bond yields. If yields drop further, lenders may pass the savings on to borrowers by offering lower fixed mortgage rates. Sung Lee, managing partner at Swivel Mortgage Group Inc., notes that recent market uncertainty due to U.S. tariffs has already led to a bond yield decline.
- Variable rates: These are directly influenced by changes to the Bank of Canada’s key interest rate. Lee explains that a 25-basis-point cut can reduce monthly payments by roughly $15 for every $100,000 borrowed. On a $500,000 mortgage, that’s an extra $75 in monthly savings.
For homeowners with static-payment variable-rate mortgages, payments won't decrease, but more of each payment will go toward paying down the principal. This helps build equity faster.
“Historically, variable rates have outperformed fixed rates over the long term, but they come with fluctuations that not everyone is comfortable with,” says Lee.
This is why Lee cautions that borrowers must consider their risk tolerance and budget flexibility when choosing between fixed and variable rates.
Related: Ask the Expert: How Trump's tariffs will affect your Canadian mortgage
Impact on housing
The Canadian housing market is seeing mixed signals as it adjusts to lower borrowing costs. Cheaper mortgages could increase activity, but trade uncertainties and regional differences might keep demand low in some areas.
“Lower rates help with affordability, but they’re not a silver bullet. When borrowing gets cheaper, demand increases, which often pushes home prices higher, —offsetting the benefit of lower mortgage payments,” says Lee.
Here’s how this dynamic is playing out differently across various markets, shaping unique opportunities and challenges for buyers and investors alike:
- Toronto condo market: Conditions favor buyers in Toronto’s condo market. An oversupply of units offers buyers more negotiating power, creating opportunities for first-time homebuyers planning to live in a condo long-term. However, Sung Lee cautions investors to avoid this market in the near term.
- High-demand areas for detached homes: Detached homes in high-demand areas, like Vancouver and Toronto, remain scarce. “Be prepared to move fast, get pre-approved, and consider expanding your search to suburbs or mid-sized cities where supply is better,” Lee says.
- Alberta and smaller cities: Affordable markets in Alberta and smaller cities are seeing rising demand. While still accessible compared to larger urban centers, buyers need to act quickly to secure good opportunities, as competition increases.
Learn more: A growing wealth gap stands between housing haves and have-nots
How lower interest rates can help you manage debt
Lower interest rates offer homeowners valuable opportunities to improve cash flow and manage debt more effectively. Here are three key ways you can benefit:
- Refinance high-interest debt: If you're carrying credit card balances with 20%+ interest, personal loans, or high-interest lines of credit, rolling that debt into a lower-rate mortgage can significantly reduce monthly payments.
- Extend amortization periods: Refinancing to lengthen your mortgage amortization (e.g., from 20 to 30 years) can lower monthly payments, providing relief for households managing tight budgets. Keep in mind this could result in higher overall interest costs over time.
- Accelerate mortgage payments: If you have financial flexibility, consider increasing your payments using prepayment privileges or switching to accelerated biweekly payments. Even small additional payments can reduce the total length of a mortgage and save thousands in interest.
By exploring these strategies, you can better leverage today’s lower interest rates to relieve financial strain and achieve long-term savings.
Read more: Is debt consolidation right for you?
What’s next?
With trade tensions escalating and economic growth at risk, further rate cuts could follow later this year.
Guatieri predicts additional cuts totaling 100 basis points this year as the central bank works to cushion the economy and spark a modest recovery.
These decisions will depend on how trade disputes evolve and whether economic data indicates further weakening.
Read more: What affects variable and fixed Canadian mortgage rates?
