The Bank of Canada (BoC) lowered its overnight lending rate—which lenders use to set their prime rates, and, by extension, variable mortgage rates—by another quarter of a percentage, bringing it to 2.75%. This rate now sits a full 225 basis points lower than when the BoC first kicked off its rate cutting cycle inJune 2024. As a result, the prime rate at most Canadian lenders will lower to 4.95%.
The main impetus behind today’s rate cut is the economic fallout from U.S. tariff threats, which have been ongoing—and rapidly evolving—since the start of the year. After initially vowing to implement blanket 25% tariffs on all Canadian imports to the States, with a 10% tariff on energy, on February 4, U.S. President Donald Trump delayed their implementation to March 4, and again to an even later April 2 deadline. (Read my take on how 25% U.S. tariffs could impact Canadian mortgage rates.)
However, while not currently in force, the tariffs have already caused cracks in the Canadian economy, preventing businesses from investing and hiring, and dampening consumer spending. That was enough to pass on this most recent rate cut, stated the BoC, despite other economic data that shows strengthening GDP and inflation.
“While economic growth has come in stronger than expected, the pervasive uncertainty created by continuously changing tariff policy is restraining consumers’ spending intentions and businesses’ plans to hire and invest. Against this background, and with inflation close to the 2% target, the Governing Council decided to reduce the policy rate by a further 25 basis points,” states the BoC’s release.
While the rate outlook remains extremely uncertain, it’s largely expected that the BoC will need to slash its benchmark a few more times, as long as tariffs persist. However, that will put the central bank in the sticky spot of stimulating the economy while sacrificing progress on inflation, as tariffs and accommodative monetary policy push prices higher. (Remember the 10 rate hikes that occurred between March 2022 and July 2023?)
In a special edition publication today, the central bank breaks down how the economic damage has evolved thus far. Titled “How Canadian businesses and households are reacting to the trade conflict” and based on consultations and surveys, the report shows Canadians are increasingly concerned about their job security. That is especially true in industries impacted by trade. It also reveals that Canadians are worried about overall financial health, and they plan to rein in spending. Credit is starting to crunch up for entrepreneurs, while the cost of business is already on the rise, such as importing capital goods, equipment, and machinery. Roughly half Canadian businesses expect they’ll need to raise prices should tariffs come to fruition, and short-term inflation expectations are also increasing.
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What does the BoC rate announcement mean to you?
Aside from squeezing your wallet, how will the current economic climate impact you? Let’s take a step back and break down the implications of today’s rate cut for borrowers, savers and investors.
The impact on Canadians with a mortgage
The BoC announcement is of interest for those with a mortgage.