On Wednesday, the Bank of Canada held its overnight rate at 2.75% with economic and ongoing tariff uncertainties as the basis for its decision.
The bank’s governors see two scenarios that could unfold, the first dealing with a high rate of uncertainty due to tariffs, which would see growth in Canada weaken temporarily, with inflation holding around the bank’s target of 2% (the consumer price index came in at 2.3% in March).
In the second scenario, a protracted trade war will cause Canada’s economy to fall into recession this year and inflation rises temporarily above 3% next year.
“Many other trade policy scenarios are possible. There is also an unusual degree of uncertainty about the economic outcomes within any scenario, since the magnitude and speed of the shift in US trade policy are unprecedented,” said the bank in a statement.
Economists at RBC Economics say their base case assumption lies somewhere in the middle.
“Currently, Canadian exports are subject to a 3.5% average tariff rate from the US by our count,” they wrote in a report “In more optimistic scenario 1, that rate is expected to drop closer to 1%. In scenario 2, it’s expected to more than quadruple to approximately 14%.”
Penelope Graham, of Ratehub.ca, said the bank’s hold was indicative of no clear direction in which the economy is heading.
“Uncertainty continues to underpin the Bank of Canada's rate outlook and decision making,” said Graham, “The central bank opted to end its cutting cycle [Wednesday] with its first rate hold since March 2024. In its commentary, the bank pointed to the effects of ongoing tariff threats and trade policy, along with the potential for an economic slump and higher inflation.”
“Higher short-term expectations for inflation, in particular, gave the bank rationale to hold on further rate stimulus, as it keeps an eye on the developing trade scenario.”
There will not be an immediate change in mortgage payments, said Graham.
“As there was no change to the overnight lending rate, variable mortgage holders will see no movement to their payments, or the amount that services interest. The prime rate will remain the same at Canadian lenders, with no downward pressure on variable mortgage rates unless lenders choose to decrease their spread to prime,” she said. “Fixed mortgage rates have already absorbed considerable discounts, following the stock market and bond yield slide that occurred the week of April 2nd.”
“Currently, five-year Government of Canada bond yields remain elevated in the 2.6% range. However, fixed mortgage rates remain competitively priced, with the lowest insured option in Canada currently at 3.79%.”
There will be no reprieve for sluggish housing sales, added Graham.
“Today’s rate hold will do little to re-incentivize home buyers, who have been increasingly hesitant to enter the market amid tariff uncertainty. The latest numbers from the Canadian Real Estate Association reveal the slowest March conditions since 2009, without additional interest rate stimulus, buyer activity is unlikely to rise in the short term,” she said.
“In volatile market conditions, it’s a great idea for those shopping for a mortgage or coming up for renewal to seek out a pre–approval to hold today’s rates for up to 120 days. This helps protect against short-term rate fluctuations.”
Investments could shine.
“The silver lining of the rate hold will be for Canadian savers and those with passive investments such as GICs. Their rate of return will remain unchanged for the time being,” said Graham.
In his daily commentary, Derek Holt, vice-president and head of capital markets economics at Scotiabank, wrote the final paragraph of the bank’s statement is “all you need to know by way of the lack of a policy bias” going forward.
"Governing Council will proceed carefully, with particular attention to the risks and uncertainties facing the Canadian economy. These include: the extent to which higher tariffs reduce demand for Canadian exports; how much this spills over into business investment, employment and household spending; how much and how quickly cost increases are passed on to consumer prices; and how inflation expectations evolve,” wrote Holt. “Monetary policy cannot resolve trade uncertainty or offset the impacts of a trade war. What it can and must do is maintain price stability for Canadians."
“They have seven weeks to further evaluate developments until the next decision sans projections on June 4 and then another eight weeks until the July 30 decision with forecasts,” he added. “Time will test their very guarded bias. The questions will become more complex by those next two meetings by encapsulating post-election domestic policies.”