The Bank of Canada Cuts Interest Rates Amid Ongoing Tariff War

On Wednesday, March 12, the Bank of Canada (BoC) announced its second interest rate change this year, lowering the policy rate by another 25 basis points to 2.75%. This marks the seventh consecutive rate cut since June 2024, when it peaked at 5%. By mid-2025, we predict further cuts until the rate reaches 2%.

As part of the escalating cross-border tariff war, the U.S. imposed 25% tariffs on most Canadian imported goods (with 10% tariffs on energy). However, the temporary, one-month pause to delay most of the United States–Mexico–Canada Agreement (USMCA) products from the North American trade agreement until April 2 leaves room for speculation on the impact it will have on interest rates and the overall Canadian economy.
 

The Influence of Tariffs and Inflation on Interest Rates

The ongoing tariff war has already started to influence our economy, leaving it in an uncertain state. The tariffs increase the cost of imported and exported goods and services, increasing Canadian consumers' prices and contributing to inflation. When inflation rises, the BoC will be pressed to adjust interest rates back up to keep inflation at 2%, as they have done in recent years.

Although the inflation rate remains around 2% and the GDP grew by 2.6% in the last quarter of 2024, a prolonged tariff war will slow down growth and reduce business investments in the long run. To prepare for this, the BoC will likely choose to continue lowering interest rates for the next few rate announcements to stimulate demand and keep things in motion. Balancing the growth of the economy and controlling inflation is the key that the BoC will have to adjust its policies to this year.

What Does This Mean For The Real Estate Market?

Increased tariffs will not only drive up construction costs and impact development projects, but they can also dampen buyer confidence and reduce investments in the real estate market. As highlighted in our Housing Market Forecast for 2025 and Beyond, the combination of high housing demand, rapid population growth, and limited new home supply will worsen the housing crisis. Coupled with the risk of recession in the face of tariffs, this creates the perfect opportunity to buy and invest in real estate!

With our projection of interest rates dropping to 2% by July 2025, we can expect a much-needed boost to the real estate market. Lowering interest rates will counterbalance the repercussions of the tariff war, and the recent mortgage rule changes will make mortgages more affordable for borrowers. Home prices have declined, and there is currently a surplus of inventory in the market, especially in places like the Greater Toronto Area. Demand for (affordable) housing will only continue to rise in the next few years.

For current mortgage holders, the impact of lowering interest rates will vary depending on whether the borrower has a fixed or variable mortgage rate. As fixed-rate mortgage holders will have the same monthly mortgage payments throughout their loan term, they will not benefit nor be disadvantaged by any interest rate changes.

On the other hand, variable mortgage holders should receive direct benefits from the falling interest rates as their monthly payments decrease. However, they will also face risk should the interest rates pick up again in the future if the economic situation changes.

Canadians will have to wait for the effects of the coming tariffs in 3 weeks to see how the Bank of Canada may respond with the next interest rate announcement on April 16.