Next Wednesday, the Bank of Canada will make its first overnight rate announcement, under the threat of tariffs being applied to Canadian exports into the United States, which could have a bearing on the bank’s decision.
“Despite previous signals that the bank will slow the cadence and size of rate cuts, tariff uncertainty, combined with the latest below-target inflation reading, should prompt another quarter-point rate cut in the upcoming January rate announcement,” says Penelope Graham of Ratehub. ca.
“The central bank will be keen to build up a buffer against economic shocks, and keep the economy pre-emptively stimulated in the face of growing recession threats.”
“The language used in the bank’s announcement may offer hints as to whether the Governing Council still believes the approach to rate cuts will be moderate, should tariff threats, and their resulting recessionary pressures, actually come to fruition.”
Graham says the bond market, which influences the bank’s decision has been volatile, not due to just potential tariffs, but “the overall implications of a Trump presidency for markets.”
“However, given how quickly investor sentiment can change, rate pricing could go in any direction.” she says. “Anyone shopping for a mortgage right now, whether coming up for renewal or purchase, should get a pre-approval and lock in with a rate hold to guarantee access to the lowest rates, even if fixed rates rise, or variable spreads to prime shrink in the coming weeks.”
Canadian Mortgage Trends surveyed economists about the bank’s move next week, with most suggesting a .25% reduction.
“Core inflation pressures have picked up over the past three months, suggesting that inflation readings are likely to move up a bit in the months ahead,” said Leslie Preston at TD Bank. “This will give the Bank of Canada reason to adopt a more gradual pace of interest rate cuts this year. We expect a quarter point cut at every other decision in 2025.”
Douglas Porter of BMO also sees a quarter point cut.
“We believe that the heavy overhang of trade uncertainty, possible US tariffs, overrides almost all else,” said Poter. “As a result, we suspect that today’s reading is just good enough to allow the Bank of Canada to trim next week, for risk management purposes.”
Derek Holt at Scotiabank expects a .25% cut.
“I don’t believe that the Bank of Canada should cut but they may well take the easy route in what’s priced,” said Holt.
“The Bank of Canada is already at or very close to a neutral rate by contrast to the US Federal Reserve, therefore, what’s the rush to cut after 175 basis points of cuts to date? I know one thing for sure: I wouldn’t cut at this point while leaving all options open going forward.”
Graham offers an example of a .25% Bank of Canada rate cut.
“A homeowner who put a 10% downpayment on a $491,161 home with a five-year variable rate of 4.45% amortized over 25 years (total mortgage amount of: $455,748) has a monthly mortgage payment of $2,510,” she says. “If the Bank of Canada announces a 25-basis point rate decrease, their variable mortgage rate will decrease to 4.2% and their monthly payment will decrease to $2,447.”
“This means that the homeowner will pay $63 less per month or $756 less per year on their mortgage payments.”
