Bank of Canada Expected to Hold Interest Rate at 2.25% Amid Trade War and Inflation Uncertainty
The Bank of Canada is widely expected to hold its benchmark interest rate at 2.25% during its upcoming September meeting, amid an escalating trade war with the United States and lingering uncertainty over the trade dispute's impact on economic growth and inflation.
The central bank had previously enacted gradual rate cuts, bringing the benchmark down from 4.75% in April 2024 to its current level of 2.25%. These rate decisions directly dictate borrowing costs, loan pricing, lines of credit, and mortgages across the Canadian market.
The inclination to hold rates steady comes despite persistent inflationary pressures. Canada's Consumer Price Index (CPI) recently rose to 3%, up from 2.8% in June, overshooting the Bank of Canada's official 2% target.
A Complex Balancing Act
The central bank currently faces a challenging macroeconomic equation. An escalating trade war could weaken exports, investments, employment, and overall economic growth. Conversely, tariffs could drive up the costs of goods and services, exacerbating inflationary pressures.
These crosscurrents support leaving the interest rate unchanged for now, allowing policymakers to monitor the trade dispute's impact on the economy and inflation before committing to further rate cuts or hikes in future meetings.
Impact on the Mortgage and Housing Market
This uncertainty is rippling through Canada's mortgage market. Fixed mortgage rates could swing in either direction in the coming period, contingent on trade war developments and bond yield fluctuations.
If the ongoing trade dispute triggers an economic slowdown and heightens recession fears, bond yields could drop, potentially driving fixed mortgage rates lower. However, sustained inflationary pressures stemming from tariffs could push bond yields and borrowing costs higher.
Variable-rate mortgages are expected to remain relatively stable in the short term as the benchmark interest rate holds at 2.25%.
Current Competitive Mortgage Rates in Canada
Mortgage Term & TypeCurrent Rate
2-Year Fixed3.89%
3-Year Fixed3.94%
5-Year Fixed4.09%
5-Year Variable3.35%
The likelihood of future rate cuts could increase if the protracted trade war exerts heavier pressure on exports, investments, the labor market, and growth, potentially prompting the Bank of Canada to step in and stimulate economic activity. Conversely, persistently high inflation would constrain the central bank's ability to cut rates quickly, tethering the trajectory of monetary policy to a delicate balance between sluggish growth and sustained price pressures.
Ultimately, the Canadian housing market is expected to feel the weight of these trade and monetary developments, with a potential increase in "wait-and-see" attitudes among both buyers and sellers amid the murky outlook for interest rates.