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Interest rate news and analysis by Jeff Laberge
April 16, 2025 - Bank of Canada Maintains Key Interest Rate
The Bank of Canada left they're overnight rate unchanged this month as Governor Tiff Macklem sited " tariffs have increased uncertainty, diminished prospects for economic growth, and raised inflation expectations. Pervasive uncertainty makes it unusually challenging to project GDP growth and inflation in Canada and globally"
This leaves variable rates unchanged.
Macklem mentioned two scenarios in his speech. "In the first scenario, uncertainty is high but tariffs are limited in scope. Canadian growth weakens temporarily and inflation remains around the 2% target. In the second scenario, a protracted trade war causes Canada’s economy to fall into recession this year and inflation rises temporarily above 3% next year.
Uncertainty aside, Macklem did note that inflation is expected to fall by stating "Starting in April, CPI inflation will be pulled down for one year by the removal of the consumer carbon tax. Lower global oil prices will also dampen inflation in the near term. However, we expect tariffs and supply chain disruptions to push up some prices".
So the conclusion we find is that inflation is expected to fall but the Bank of Canada is holding rates due to the unpredictable nature of Donald Trump.
April 15, 2025 - Inflation falls from 2.60% to 2.30%
Inflation in Canada fell from 2.60% to 2.30% in March, mainly due to a fall in energy prices and and specifically gasoline, due to the cancellation of the carbon tax..
The cost of shelter was up slightly as were the cost of groceries. The slight increase in the cost of groceries may continue as Canadians avoid purchasing U.S. made food products, forcing more demand on products from trade friendly nations, while demand for oil and energy may decline as the global economy slows from U.S. tariff measures.
April 3, 2025 (11:30am) - Fixed Interest Rate Reaction to Tariff Announcement
So far since the announcement of the global counter-tariffs by the Trump administration, markets around the globe have suffered significant losses, and as you can see in the chart, Government of Canada bond yields have seen downward pressure since the announcement.
The moment that investors and traders were able to see the list of tariffs on live video, the stock markets, and the yields fell immediately.
The trading session for the day was only a couple of hours into the trading day at the time of this chart, so it is too early to say with certainty, what the full impact of the tariffs will be on our bond yields, and subsequently, fixed interest rates.
April 1, 2025 - The Journey of Fixed Rates - Pandemic to Present
The chart in this article illustrates the journey of government bond yields (and subsequently fixed rates) since the pandemic.
You can see in the chart the rates were at historic lows during the pandemic but as inflation rose, the yields rose as well. The Bank of Canada then began aggressively raising rates to bring down inflation, which had it's desired effect, causing the yields to stabilize somewhat, with the peak occurring in late 2023.
The yields have been coming down since the peak because inflation is now at the Bank of Canada's target rate.
When yields or stock prices follow a long term trend, it is never in a straight line and there are bounces along the way.
In the chart you will see "bounce 1" and "bounce 2". When prices, be it stock prices, bond prices, or bond yields, hit previous highs and lows where strong past changes of direction occurred, the prices/yields will reverse their trending direction momentarily as investors take profits and stop losses. This is because investors, as well as the computer-based trading systems they use, all use the same technical indicators (chart patterns) to determine when to expect changes of direction to occur.
Since they all use the same patterns to determine price direction, it is almost guaranteed that these patterns will occur since prices move in the direction of the majority of positions held (if there are more buyers, it goes up, and vice versa).
Eventually the yields should clear the previous low which caused "bounce 2", and they should continue to fall from that point onward leading to lower fixed mortgage rates.
Feb. 18, 2025 - Inflation up slightly to 1.90%
Canada's consumer price index rose slightly form 1.80% in December, to 1.90% in January. This change is not large enough to have any severe impact on interest rates, as the stats still include shelter costs which have been elevated due to high interest rates which are expected to fall.
The rise seems to be almost completely caused by a slight rise in the price of gasoline, but overall prices were subdued by the GST/HST tax holiday. Since inflation on items is measured on the final price paid for items, including taxes paid on the items, inflation was lower on most items than it would have been without the tax holiday.
Feb. 3, 2025 - Tariffs and Interest Rates
Over the weekend, the Trump administration announced that they will implement a 25% tariff on Canadian exports to the U.S., with a reduced tariff of 10% on Canadian energy exports to the U.S..
Impact so far on fixed rates
So far the confirmation of the tariffs has caused government of Canada bond yields, which are the basis for fixed mortgage rates in Canada, to fall significantly in the first few hours of trading since the decision was announced. This will almost immediately cause a slight decrease in fixed rates, but we are still only in the first few hours of trading and cannot confirm with certainty at this point if the downward trend will continue, and if so, how far rates will fall.
Potential impact on variable rates
I cannot of course speak for the Bank of Canada, but the longer the tariffs stay in place, the more businesses and industries that are affected by tariffs will suffer, which will lead us into a recession.
During a recession, the Bank of Canada lowers their key interest rate to stimulate the economy by making borrowing less expensive.
One major Canadian bank has asked the Bank of Canada to make an emergency rate cut in response to the tariffs, which is an indication of how some economists are reacting to the news and what they believe will help. The only risk of the Bank of Canada lowering the key interest rate too quickly is that it will send our dollar downward, which will make imports into our country even more expensive, leading to higher inflation. Rising inflation while experiencing rising unemployment causes what is called stagflation, which is a nightmare scenario for an economy, and likely the Bank of Canada’s greatest fear at the moment. The Bank of Canada will therefore be facing a balancing act.
There is no reason to panic at this time about what impact the tariffs will have on interest rates. Almost all indications at this point show rates going to the downside which is good for borrowers. The real concern for Canadians at this point seems to be the chance of elevated unemployment, with certain sectors being hit harder than others. Our thoughts are with the Canadian who will have their household incomes affected by these outrageous tariffs and hope that our government will make the right decisions to help them keep on financial track.
Please contact me with any questions you may have, and Buy Canadian!
