Bank of Canada (BOC) lowered its overnight loan rate (the lender used to set its primary interest rate and expanded to a variable mortgage rate), swapping it for a quarter of a percentage, boosting it to 2.75%. Now, this rate is 225 basis points lower than the rate at which BOC first initiates its downgrade cycle 2024. As a result, the highest interest rates for most Canadian lenders will be reduced to 4.95%.
The main driving force for lowering tax rates today is that the economic impact of the U.S. tariff threat has been evolving at the beginning of this year. On the initial vow to ratify 25% tax rate (energy tariffs on February 4) for all Canadian import approvals, U.S. President Donald Trump delayed its implementation until March 4 and once again extended the deadline for late April 2. (Read my opinion on how the 25% U.S. tariff affects Canadian mortgage rates.)
But while not yet in effect, tariffs have triggered cracking of the Canadian economy, preventing corporate investment and hiring and weakening consumer spending. BOC said that while other economic data suggest GDP and inflation are strengthening, this is enough to bring this latest downgrade.
“Although the intensity of economic growth is stronger than expected, the general uncertainty created by changing tariff policies limits consumer spending intentions and business leasing and investment plans. In this context, as inflation approaches the 2% target, the Council decided to lower the policy rate by 25 basis points,” BOC Release said.
Although the rate outlook remains very uncertain, BOC is largely expected to need to cut the benchmark a few more times as long as tariffs continue. However, this will put central banks in a tricky position to stimulate the economy while sacrificing the progress of inflation as tariffs and adaptive monetary policies raise prices. (Remember the 10 interest rate hikes that occurred between March 2022 and July 2023?)
In today’s special edition publications, central banks break how economic damage has developed so far. The report, titled “How Canadian businesses and families respond to trade conflicts” and, according to consultations and surveys, shows that Canadians are increasingly concerned about their job security. This is especially true in trade-affected industries. It also reveals Canadians are concerned about their overall financial situation and they plan to control spending. Entrepreneurs’ credit has begun to tighten, while business costs are already rising, such as importing capital goods, equipment and machinery. About half of Canadian businesses expect that if tariffs are met, they will need to raise prices, and short-term inflation expectations are increasing.
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What does the BOC rate announcement mean to you?
In addition to squeezing your wallet, how will the current economic climate affect you? Let’s take a step back and break the impact on borrowers, savers and investors on lower tax rates.
The impact of mortgage on Canadians
For those with mortgages, the BOC announcement is interesting.
