Regardless of what the Bank of Canada does with its overnight rate on Wednesday — hold, cut or increase — fixed mortgage rates will soon be on the rise, say economists.
Fixed rates are influenced by Government of Canada bond yields and US treasury yields; when the yields increase, so do fixed mortgage rates.
Canadian yields have been rising over the summer months, and US yields have recently been on the upswing as well, putting pressure on fixed mortgage rates.
Sherry Cooper, chief economist at Dominion Lending Centres Group, told Canadian Mortgage Professional (CMP) that bond market jitters south of the border could impact the rate outlook in Canada.
“Another question mark is interest rates and market-driven interest rates,” said Cooper. “Last week, we saw a rise in US long-term interest rates, thanks in large measure to inflation fears, but mostly the $40 trillion worth of US government debt and very, very strong corporate borrowing by AI-related firms.”
“So there’s concern about government borrowing in the US, and upward pressure on their long-term interest rates generally spills into Canada. That’s another big uncertainty.”
Concerns about higher inflation have grown in Canada and the US in recent months, driven by the war in Iran and oil price increases.
The Canada/US tariff war will result in higher prices across a range of goods in both countries that will be absorbed by consumers, with the potential of lighting a fire under rising inflation.
“It’s just a very dicey scenario,” Micky Khaneka, a Toronto-based mortgage broker with Team MKG, told CMP. “If the tariffs keep continuing to push costs, it will eventually lead to higher inflation, which would then eventually put upward pressure on bond yields, then pushing fixed rates higher.”
“This week’s trade war escalation seems to have taken Bank of Canada rate hikes out of play and economists, including BMO’s Robert Kavcic, say the new threat to the economy could steer the central bank in a more dovish direction,” says CMP. “For now, few experts see rate cuts anytime soon, but it remains unclear how long tariffs will stay in place, and whether further US levies on Canada could be ahead.”
If the economic impact on the Canadian economy becomes worse than projected, it may force the Bank of Canada to cut its rate at its December meeting.
“On the other side it could be that if this is going to cause a huge detriment to our economy and further weaken it, then the Bank of Canada will find themselves in a position where they have to stimulate and then cut,” Khaneka said. “So the variable mortgage rate might see a little bit of a brighter side to that equation.”
The Trump administration put 50% tariffs on Canadian imports, including dairy products, alcoholic beverages, building materials, consumer goods, and industrial and personal items.
Servus chief economist Charles St-Arnaud told CMP these measures are still less menacing than the huge blanket levies threatened by Trump at the beginning of last year.
“The hit is not going to be that big. It’s only 5% of our exports,” said St.-Arnaud. “There’ll be some headwinds for the labour market, probably some job losses, but I don’t think it’s going to be as bad as what we had in 2025 with the initial wave.”
“I think the question is really: Where do we go from here? We’re back in uncertainty for businesses, uncertainty for households. We have the counter-tariffs that are going to have some impact, mostly on inflation. So how bad does it get? It’s clear it’s going to be a headwind on the Canadian economy in the short term.”
Expectations are that the bank will keep its benchmark interest rate on hold when it meets on Wednesday.
“Many economists see that stance continuing through the coming months, meaning variable rates aren’t likely to budge anytime soon,” says CMP. “But there could be bigger questions ahead about the direction of fixed rates.”