Bank of Canada Cuts Interest Rates to 2.75%

How the Tariff War and Rate Cuts Could Impact the Real Estate Market

On Wednesday, March 12, the Bank of Canada (BoC) announced its second interest rate cut of the year, lowering the policy rate by 25 basis points to 2.75%. This marks the seventh consecutive rate reduction since June 2024, when rates peaked at 5%. Economists predict that the BoC will continue to cut rates through mid-2025, potentially bringing the rate down to 2% in an effort to stimulate economic growth amid ongoing trade tensions.

The decision comes as the U.S. escalates its tariff war with Canada, imposing 25% tariffs on most Canadian imported goods, including a 10% tariff on energy products. While the U.S. has temporarily delayed implementing tariffs on products covered under the United States–Mexico–Canada Agreement (USMCA) until April 2, the uncertainty surrounding trade policy has already begun to weigh on the Canadian economy.

The Impact of Tariffs and Inflation on Interest Rates

The tariff war has introduced significant uncertainty into the Canadian economy, driving up the cost of imported and exported goods. These increased costs are likely to push prices higher for Canadian consumers, contributing to inflationary pressures. While inflation currently remains close to the BoC’s 2% target, a prolonged trade war could disrupt this balance, forcing the central bank to carefully navigate between stimulating economic growth and controlling inflation.

Despite a strong GDP growth rate of 2.6% in the fourth quarter of 2024, the BoC has signaled that the economic outlook remains fragile. The ongoing trade tensions are expected to slow business investment and reduce consumer confidence, prompting the central bank to adopt a more accommodative monetary policy. Lowering interest rates is one way to encourage borrowing and spending, helping to offset the negative effects of the tariff war.

What This Means for the Real Estate Market

The combination of rising tariffs and falling interest rates is likely to have a mixed impact on the real estate market. On one hand, higher tariffs could drive up construction costs, making it more expensive to build new homes and potentially slowing development projects. On the other hand, lower interest rates could make mortgages more affordable, boosting demand for housing.

For buyers, the current environment presents a unique opportunity. With interest rates projected to fall to 2% by mid-2025 and home prices stabilizing in many regions, affordability is improving. Additionally, recent changes to mortgage rules have made it easier for borrowers to qualify for loans, further supporting demand.

However, the tariff war and its potential to dampen consumer confidence could create headwinds for the market. If economic uncertainty persists, some buyers may delay their purchasing decisions, leading to a slowdown in market activity.

What Homeowners and Buyers Should Know

For current homeowners, the impact of lower interest rates will depend on the type of mortgage they hold. Fixed-rate mortgage holders will not see any immediate change in their monthly payments, as their rates are locked in for the term of their loan. However, variable-rate mortgage holders could benefit from lower monthly payments as interest rates decline. That said, variable-rate borrowers should be prepared for the possibility of rate increases in the future if economic conditions change.

For prospective buyers, the current environment offers a chance to lock in historically low mortgage rates while home prices remain relatively stable. With a surplus of inventory in some markets, such as the Greater Toronto Area, buyers may find more options and negotiating power than in previous years.

Looking Ahead

The coming weeks will be critical in determining the trajectory of the Canadian economy and the real estate market. The U.S. is set to revisit its tariff policies on April 2, and the BoC will announce its next interest rate decision on April 16. These developments will provide further clarity on how the trade war will impact inflation, economic growth, and housing demand.

In the meantime, real estate professionals and consumers alike should stay informed and prepared for potential shifts in the market. While challenges remain, the combination of lower interest rates and evolving market conditions could create opportunities for those looking to buy, sell, or invest in real estate.