Dan Eisner, True North Founder and CEO, speculates on emerging economic factors and where interest rates may be headed.
Variable rates are paused, and fixed rates are being held higher. Yet, U.S. trade and tax disruption may start to tip rate forecasts toward recession, even with inflation waving from the sidelines. Here’s my take on how the economic tug-of-war could change rates this year.
On June 4, 2025, the Bank of Canada mellows out with a second hold in a row, keeping its policy rate at 2.75% and most bank prime rates at 4.95%.
BoC is in slo-mo mode — taking time to monitor which compelling economic blobs might rise to the surface next (hopefully not inflation).
Stay tuned for the next rate decision on July 30, 2025. Get timely updates — sign up for our newsletter.
As the founder and CEO of True North, I'm always asked about interest rates. That makes perfect sense as we've built True North Mortgage to offer the lowest mortgage rates around — with a simple, fast, client-focused service. Many of our competitors have tried to copy us ever since.
After 9 cuts of 0.25% since June 2024, the Bank of Canada's policy rate has reached its theoretical 'neutral rate' of 2.75% (from a 5.0% high) — and is expected to go lower to spur economic growth.
Rates are caught in the eye of the U.S. trade and policy storm — will winds shift toward recession (more cuts) or inflation (more pauses)? Concerning numbers and bond market troubles suggest the storm is growing.
For deeper insight into how and why trade disruption could affect mortgage rates, including updates on U.S. and Canadian tariff dates, read our companion blog: How Trump's Tariffs Could Impact Mortgage Rates in 2025
Prime rates affect variable mortgage rates, and fixed mortgage rates are set by the bond market.
The short answer? The Bank of Canada is awaiting further evidence that a cooling economy will wash away some of the tariff inflation risks — and that higher demand isn't feeding into them.
Canada is sailing through unfamiliar waters, with disruptive U.S. trade and fiscal policies stirring up global winds of change. Recent economic numbers seem calmer on the surface, but below, trouble is churning.
It's those surface numbers, however, that the Bank of Canada is using to guide its recent decisions on the overnight lending rate (its policy rate that informs where interest rates are set).
April's headline inflation was a cooler 1.7%, but core CPI rose above 3% (the highest since March 2024), and wage settlements are running near 4%. The BoC wants more evidence that the inflation risk on deck is stemming from a short-term tariff shock that will soon be tempered by a cooling economy, rather than a sustained increase in demand.
Since it dropped the ball on getting ahead of post-pandemic inflation, the BoC is keen to stamp out rising inflation expectations sooner rather than play catch-up later.
Adding to the 'pause' pressure is the potential inflationary impact of rising global bond yields. Waning global confidence in U.S. fiscal policy is resulting in plummeting Treasury bond prices. As yields increase, the U.S. Federal Reserve is buying up its own bonds to stabilize the market. This move, unofficial Quantitative Easing (QE) support, is injecting more cash into the U.S. economy.
Remember higher inflation after the pandemic? QE, a mandated government policy aimed at rescuing the economy, was a significant factor contributing to surging post-pandemic inflation and the higher interest rates needed to tame it.
And one more to mention — cutting rates while global yields climb risks weakening the Canadian dollar, which would add to existing inflationary pressures.
There will be not one but two inflation readings before the July 30 meeting, offering up a stronger assessment of the economic indicators battering this rate ship, and whether it's safer to float more cuts — which we still expect to see this year. Stay tuned!
Sudden U.S. tariffs imposed on Canadian imports, along with Canadian retaliation on U.S. imports, could bring a different kind of inflation. Demand-pull inflation is what we're used to, which the BoC fights to bring down with higher interest rates.
However, higher prices that are passed onto consumers due to 'artificially' higher input costs for businesses (such as from tariffs paid to the 'imposing' government) are seen as cost-push inflation. Raising interest rates against this type of inflation dilemma could lead to deeper economic damage, risking stagflation.
Cooling numbers all around will keep the Bank of Canada on its current rate-cutting course:
What happens if too many factors are showing heat? Then, we start looking for the BoC to pause its current rate-cut agenda.
I had expected a BoC resting policy rate of 2.5% by the end of 2025, with bank prime rates at 4.70%. Bank prime interest rates directly impact variable mortgage and HELOC rates. (Currently, there's a 2.2% spread between the central bank's rate and most bank prime rates.)
Whether it's the threat of U.S. tariffs or other proposed U.S. taxes on Canadian investments and businesses, the impact on our economy is already evident, with small businesses being the first to suffer the most, and supply chain disruptions already affecting pricing and jobs up and down the line.
Despite higher inflation expected, the forecast economic stife is leading some economists to predict the BoC might have to cut its rate another 2 to 5 times (0.25% drops) to a policy rate of at least 2.25% (and maybe as far down as 1.5%) — for a prime rate of at least 4.45%.
Currently, I see the BoC's policy rate coming down to 2.25% by the third quarter of 2025, with rate drops tempered by a higher-price environment for Canadians. A quickly deepening recession could see the cuts coming faster and deeper.
Read here for more on how trade tariffs are impacting mortgage rates this year, including how tariffs have worked out for everyone in the past.
The BoC had indicated (before tariffs) that its neutral rate, a rate point where the economy is neither stimulated nor repressed, is pegged at around 2.75. However, rates likely need to go lower to stimulate an economy dragged down by trade turmoil.
There's always the danger that bank prime rates (led by the BoC policy rate) could increase to thwart inflation, although the economic softening already underway as a result of tariffs makes it unlikely for this year.
Note that bond yields, which inform fixed rates, will be pushed and pulled by a mix of forces. In the short term, political and economic volatility is likely to push yields and fixed rates up (response to inflationary and global instability). But if more than one further interest rate cut is anticipated for 2025, look for a dedicated downward trend.
Fixed mortgage rates will experience fluctuation between interest rate announcements. Read more here.
Did you know? CPI (Consumer Price Index) measures the monthly change in prices (from a fixed basket of goods and services) paid by Canadian consumers. It's the most widely used measure of inflation. See 2024 CPI readings here.
Canada's headline inflation in April dipped to 1.7% (from March's 2.3%), with the end of the consumer carbon tax and lower oil prices leading the dip.
Sounds great, but wait. The average core inflation (median and trim) rose to 3.15%. And stripping out energy means headline inflation was actually 2.9%.
The core inflation can be predictive of the future inflation pace, which the Bank of Canada uses to help inform its rate path. So, the core rise suggests that prices are showing tariff consequences faster than predicted — the BoC had forecast inflation to show more persistent pressure during the latter half of 2025.
This latest CPI report will complicate the BoC's June rate decision, though it may decide to throw on the blinders and stick to the headline reading on this one, with two more CPI readings to guide it before the July rate date.
Canada's April unemployment rate rose to 6.9% from 6.7% last month, despite 7.4K jobs created. Between this month and last, the manufacturing sector job loss was on par with the pandemic-related hit. According to the National Bank, Canada's labour weakness is most pronounced in the prime-age worker cohort (25-54), with a loss of over 42K over two months, which could amplify the impact on consumption and the housing market.
Clearly, Canadian businesses are being impacted by the trade disruption at the behest of U.S. President Trump, turning a previously stabilizing job market into the headwinds of economic woe.
So, this labour print should help convince the BoC to start cutting rates again this spring.
In 2024, Canadian GDP grew by more than expected, with a revised annualized pace of 2.6% (real GDP Q4 growth was 0.4%, quarter-over-quarter).
But in 2025, tariff trouble is disrupting a post-pandemic recovery — just how much still remains to be seen.
So far this year, growth has sailed into stronger headwinds, although Q1 2025 saw an unexpected GDP gain of 0.4%, matching the increase in Q4 2024. March GDP gained by 0.1% following a contraction of 0.2% in February, and April may eek out a 0.1% increase. However, these 'gains' are being put down to increased pre-tariff activity, as orders and shipping were motivated by impending (or the threat of impending) U.S. tariffs.
Domestic growth remained flat for the quarter — a sign that Canadians were pulling back on spending.
National housing sales fell again in March 2025, and listings increased slightly; home prices remained relatively stable.
Will lowering interest rates (and new mortgage rules favouring younger buyers) encourage some buyers out this spring despite the trade-induced economic turmoil? Perhaps not, if financial concerns override the spring feeling of looking for a new home — or if home prices rise from a lack of inventory.
Like it or not, our countries' economies are closely linked.
With a Trump presidency, here are some current concerns:
Here's a look at the inflation rate over the past year — now hovering around the Bank of Canada's target of 2.0% from a high of 8.1% reached in June 2022.
Total CPI (Consumer Price Index) is represented as an annual inflation rate (headline inflation), which appears in the media the most. It reflects the year-over-year price change percentage for a weighted basket of goods (including volatile ones, like gas and food).
Core inflation is closely monitored by the BoC. We show the average of trim and median, which strip out extreme price volatility to get to the 'core' of price movements.
CPIX excludes the most volatile price components and strips any effect of indirect tax changes on what's left (hence the X). The BoC stopped using this measure in 2016, though many experts still use it to gauge the 'bare' impact of price changes.
Fixed mortgage rates are steered by the Canadian bond market and (eventually) follow the movements in bond yields up or down. 5-year bond yields are the standard for setting 5-year fixed rates and are the reference in this section and blog.
Canada's 5-year bond yields are bouncing between 2.7% and 2.9%, following good-not-good Canadian inflation and GDP reports, and under pressure from a concerning lack of global buyer interest in the U.S. Treasury (bond) market. Note that this U.S. effect on Canadian bonds isn't about inflation, and would introduce another reason for interest rates to remain higher.
Adding to inflationary issues, despite the U.S. pausing its trade war with China, significant shipment interruptions are leading to higher transportation costs (such as increased demand for trucking services), which may severely impact business input prices in the short term.
Anyone watching bond markets right now is wondering when the rate-decline forecasts will begin to reflect (hint: when economic factors start to show weakening bubbling to the top). For now, most fixed mortgage offerings remain steady, waiting for the eye of the trade storm to pass over.
Expect lender specials to pop up or disappear quickly on specific fixed-rate terms, depending on yield movements. Lenders are closely monitoring their costs and retaining capital to address the potential for increasing debt arrears.
Current fixed rates have largely held their market position, having factored in one more BoC prime rate cut (whenever that may happen).
A looming recession would see fixed rates drop further in anticipation of additional prime rate cuts. However, if inflation and bond-market weakening (lower bond prices produce higher yields) rear their head before a recession hits, look for fixed rates to increase slightly if yields stick on an upward trend.
Fixed Mortgage Rate Watch: You can watch the fluctuations in 5-year bond yields in reaction to the latest economic news. For the most part, yields try to anticipate the inevitable: a soft landing or hard thud that will signal an about-face in the BoC's rate agenda.
The U.S. economic landscape was looking pretty strong (along with rising inflation), but Trump's tariffs and mass government firings are showing up as underlying cracks.
The fresh U.S. President Trump/billionaire Elon Musk administration has thrown substantial uncertainty into how both economies will fare as 2025 is certain to become a year to remember (or forget).
Why do we care? Economic conditions south of the border can influence factors weighed by our central bank (and drive higher prices or economic detraction here) to affect its rate decisions.
Despite the constant, distant calls of the 'recession' loon, it hasn't yet flown into our backyard. However, the recent trade disruption may finally beckon a hasty landing.
With the high-interest-rate environment so quickly imposed on Canadians to tame high inflation post-pandemic, a mild recession had been expected through the first half of 2024, which didn't materialize. Until Trump took office, Canada's growth projections were starting to look up for 2025.
Will market resilience keep our economy out of recessionary territory? Some experts expect a recessionary shock from the trade war. In time, it's hoped that Canadian businesses will adapt.
Canadian initiatives are already underway in an attempt to head off an economic blow — such as reducing inter-provincial trade barriers, reviewing restrictive government regulations that choke our productivity, and unfurling more international trade opportunities.
Before the trade disruption, our labour market and economic growth were showing signs of strength, yet household budgets are still straining under the higher prices all around.
If economic weakening accelerates, the BoC would likely drop prime rates faster (assuming that job losses and spending pull back would place downward pressure on inflation's pace), providing more budget relief when we'll likely need it most.
Stagflation, an entrenched state of high inflation coupled with a weak economy and high unemployment, is on everyone's radar. The conditions for stagflation don't currently exist, as our inflation pace isn't high enough, having come down to around 2% from over 8%, and our unemployment rate is still within the 6's range.
Those conditions could change if cost-push inflation (artificially higher consumer prices due to tariffs instead of high demand) soars, the economy weakens, and declining interest rates don't spur enough (or fast enough) rebound spending.
Fact: A recession is technically considered an economic contraction reported for at least two financial quarters in a row, but typically a pronounced and persistent period of economic decline.
Home affordability has improved slightly in early 2025 as interest rates went lower, and home prices have remained relatively flat.
There was anticipation of a spring housing rush as prime rates ease off — however, if the trade war continues, many home buyers will likely hold off on a purchase amid this economic uncertainty.
Sellers are disappearing from housing activity as well, not wanting to make their move until some of the tariff dust settles or when higher demand can help them get a good selling price.
Buyers who have enough financial depth or need to move will still go looking and are likely to find deals on both mortgage rates and home prices if market competition remains subdued.
And with over 1M renewals coming up in 2025, mortgage activity will (always) soldier on. At the very least, renewers can look toward lowering rates this year to help buffer the differential between then and now rates for (hopefully) better mortgage payments than they had worried about.
Whether rates are falling or rising, your best rate and mortgage can help you better afford your home. Many Canadians are still very unaware that they don't have to stick to their bank for a mortgage, for a purchase, renewal or refinance.
First-time home buyers, especially, need expert advice to set them on a path to successful homeownership amid all these price pressures.
Variable rates are moving down and can offer instant budget savings at each rate cut versus locking into a 5-year fixed rate and watching rates drop from the sidelines. If you get nervous, you can always lock into a fixed rate without penalty (most lenders allow this mortgage move).
Waiting to see what rates will do? Consider locking into a shorter fixed rate — such as our low short-term fixed Rate Relief™ product. If this product is right for you, it can help you bridge the gap with budget relief now while allowing time to pass before deciding on a longer commitment.
Owning a home is a tremendous source of pride in Canada. I created True North to provide clients with a better mortgage experience and save them thousands with their best rate and mortgage choice.
Have questions about your mortgage or pre-approval? Give us a shout, anywhere you are in Canada. We have your best rate, expert advice and unbeatable service — with over 16,000 5-star reviews from our happy clients.
Updated. Will trade disruptions drive mortgage rates lower, even if inflation goes higher?
Find out how what penalty you might pay and when it makes sense to break.
How to decide between variable-rate FOMO or JOMO? We can help.
