Tariffs would bring a different kind of inflation.
There's more than one kind of inflation? More specifically, there are different mechanisms that can inflate inflation.
Demand-pull inflation is what we're used to, where prices rise from hotter demand while supply lacks and which the BoC fights to cool down with higher interest rates.
However, higher prices passed onto consumers due to 'artificially' higher input costs for businesses (say, from broad tariffs) are seen as push-cost inflation.
Tariff-induced push-cost inflation wouldn't necessarily invite the same rate-hike solution as demand-pull inflation from booming activity (as we saw post-pandemic).
Raising interest rates to combat flourishing push-cost inflation could cause deeper economic damage and risk stagflation — an entrenched state of high inflation coupled with a weak economy and high unemployment.
Keep in mind that Canada’s economy is still in recovery mode from recent higher interest rates — and current GDP projections lack the momentum to sustain very long against the percussive pounding of all-out tariffs.
Variable mortgage rates — flexibility in uncertain 'tariff' times.
Variable mortgage rates (and those for HELOCs) float and change along with BoC interest rate movements (which inform bank prime rates).
Interest rates are likely to fall to prop up a tariff-weakened economy, decreasing variable rates further this year than originally forecast (sans tariffs).
For homeowners, the result could translate into significant savings from lower mortgage payments (or reduction in amortization for those with fixed-payment variable mortgages) — a potential silver lining for those comfortable banking on the 'risk for change' posed by a variable rate choice.
Dan Eisner, founder and CEO of True North Mortgage, suggests that if 2025 turns into the Year of the Tariffs, “a variable rate could be the mortgage ace up a homeowner’s sleeve amid economic uncertainty. They can always switch to a fixed rate, penalty-free, if they get nervous."
If blanket tariffs are a go — economists are calling for BoC’s policy rate to be cut in half (from 3.0% down to 1.5% over a few months) to support the economic fallout.
Fixed mortgage rates — stability amid trade and economic shifts.
Unlike variable rates, fixed mortgage rates are set according to bond yields, which respond to market factors and fluctuations. This rate type isn’t directly tied to interest rate changes but anticipates where they go.
Fixed is the favourite choice of risk-averse homeowners. Many may still choose it to ride out economic volatility despite potential savings from a variable rate.
Would fixed rates drop, too? In the face of full tariffs, the 5-year fixed rate would likely also be drummed down. Current fixed rates have priced in about 2 more prime rate cuts — but if more rate cuts are expected, bond yields will drop accordingly (and stay in that range), bringing fixed rates with them.
At some point, however, fixed rates would stop their decline, and variable rates would continue dropping (to the anticipated BoC 'rest' rate).
See fixed mortgage rates going down right now? Be forewarned that bond yields are usually volatile in times of uncertainty. They could experience upside pressure at every emerging economic factor, to bump fixed rates around until prime rate declines are imminent.
So, if you're planning on buying a home or renewing your mortgage based on a recent fixed-rate decline — make sure to call your expert broker to hold your rate.
What about no tariffs? Or somewhere in between?
Outside of trade disruption, many economists believe that interest rates are still too restrictive.
Core (demand-pull) inflation, however, is already feeling the upside pressure (like from a lowering Canadian dollar and humming U.S. economic growth).
In the short term, the BoC had been contemplating a rate pause in early 2025, but now, due to trade volatility already being felt by Canadian businesses, the real pressure is coming from a weaker economy.
The central bank will assess economic readings to either pause its rate at 3.0% or start reducing, depending on the tariff threat or impact.
Could interest rates rise because of tariffs?
No one’s crystal ball can answer that definitively. If the BoC sees too much immediate demand-pull inflation from disrupted supply chains but no wider economic slowdown, or a concerning co-mingling of inflation types, it’s never completely out of the question.
However, with Canada’s economy still reeling from the last rate-hike go-round — there's a much stronger case for pauses or cuts rather than hikes.
Need sound (proof) mortgage advice? A trusted mortgage brokerage can help.
Whether Canada (and the U.S.) gets jackhammered by tariffs, or no tariffs materialize — be sure to seek out a highly trained, salaried (non-commissioned) broker to help guide your mortgage decisions with unbiased advice and access to discounted rates.
Need a customized mortgage solution to get through? Look for flexibility beyond what the banks will offer at a trusted top brokerage like True North Mortgage.
With everything going on, the potential impact of tariffs on mortgage rates will continue to evolve — check here for the latest outlook.
