The Bank of Canada (BoC) has moved decisively to support the Canadian economy by cutting its benchmark interest rate by 25 basis points, lowering it to 3%, the sixth consecutive cut since mid-2024. This strategic move is anticipated to significantly impact both the housing market and household budgets across the nation.
With the latest cut announced on January 29, 2025, experts are chiming in on how this will affect various sectors. According to BoC Governor Tiff Macklem, the cut is meant to stimulate spending and economic activity at a time when uncertainties loom over the global market.
Phil Soper, president and CEO of Royal LePage, noted, "This [cut] will increase borrowing capacity for homebuyers and benefit mortgage holders whose loans are coming up for renewal". The timing of the cut is particularly opportunistic, coinciding with the upcoming spring housing market, traditionally vibrant for property sales.
Tracking the cumulative series of cuts initiated since last June, this reduction reflects the Bank's commitment to easing financial conditions amid challenging economic circumstances. For many Canadians, the BoC’s interest rate cuts have been welcome news. Rates have dropped from 5% to 3%, directly affecting borrowing costs on mortgages and loans.
James Orlando, TD Economist, shared insights on the latest decision, stating, "While the Bank has moved from a cut of 50 basis points to 25 basis points, today's decision shows the central bank is willing to increase the interest rate gap with the U.S., notwithstanding the pressure this will put on the Loonie". With this rate cut, variable mortgage rates are expected to decrease, providing some relief to homeowners. Borrowers with variable rates could see monthly payments decrease by around $87, translating to annual savings exceeding $1,000, assuming other conditions remain stable.
Experts at Ratehub predict lower mortgage payments for many, stating, "A homeowner who adjusted their mortgage after today’s announcement will see their monthly mortgage payment drop to approximately $3,371. This means the homeowner will pay $87 less monthly or $1,044 less yearly on their mortgage payments". Such statistical relief can greatly impact household budgets as many families manage the ramifications of rising costs of living.
Despite the positive effects on mortgage rates, uncertainty surrounds the economic environment as U.S. President Donald Trump continues to threaten tariffs on Canadian products. These potential tariffs could significantly disrupt the anticipated benefits from the interest rate cuts. Macklem described the tariff situation as "a major new uncertainty" and expressed concern about inflationary impacts if counter-tariffs were imposed.
“Let's say they impose these large tariffs and the Canadian government responds, as they have communicated, with counter tariffs,” Justin Herlick, CEO of Pine, explained. “That’s going to be largely inflationary, right? And if it's largely inflationary, then the Bank of Canada won't be able to cut as per its plan, which will leave mortgage rates higher.”
This complicated dance between interest rates and international trade policy leaves many consumers wary. Clay Jarvis, real estate expert at Nerdwallet Canada, stated, “If people are missing their car payments or falling behind on their credit cards, I question whether those people are ready to take on a multi-hundred-thousand-dollar mortgage.” Many potential homebuyers are hesitant as they weigh the risks against the opportunities presented by decreasing interest rates.
The BoC's acknowledgment of the potential for tariffs to influence future monetary policy reflects heightened awareness among officials of the interplay between global events and domestic economic conditions. The Bank has made it clear it will continue to monitor these factors closely.
Looking at the broader economic picture, the BoC's current outlook remains cautious. The central bank projects GDP growth of around 1.8% over the next two years, but the threat of trade conflicts looms large. “Lower interest rates are boosting household spending and the economy is expected to strengthen gradually and inflation to stay close to target,” the BoC stated, emphasizing its role as a stabilizing force.
With the new interest rate set at 3%, experts anticipate continued monitoring of economic developments and possibly more cuts depending on inflation trends and North American trade dynamics. “The Bank of Canada will continue monitoring the uncertain economic conditions,” noted Orlando, reinforcing the notion of strategic caution going forward.
Upcoming legislative changes, such as the introduction of 30-year amortizations for newly constructed homes, reflect the government’s efforts to improve housing accessibility and affordability for Canadians. These reforms are notable, with changes to down payment requirements aiming to ease barriers for buyers who previously struggled with steep upfront costs.
Both Soper and Graham predict additional interest rate cuts this year, as economic challenges arise from potential tariff tit-for-tat scenarios. “A recession resulting from tariffs could prompt additional cuts to stimulate the economy,” Soper warned.
Overall, the recent interest rate cut provides some immediate relief yet serves as just one piece of the complex financial puzzle facing Canadian consumers. With uncertainty still ruling the day, many individuals will need to adapt their financial strategies to navigate this new economic terrain effectively.