Could Trumps Tarrifs Impact Mortgage Rates in 2025
Could Trumps Tariffs Impact Mortgage Rates in 2025
Political and economic forces threaten to forge an unexpected interest rate path in Canada.
Trump starts imposing tariffs on some Canadian imports, despite the
'pause' promised. Will the threat of trade disruption send shock waves
through markets, shifting the ground beneath variable and fixed mortgage
choices this year?
Trump's recent tariff threats could have major impacts on trade between the U.S. and Canada. The proposed tariffs could start as soon as March 4, including a 25% tax on most imported Canadian goods and a 10% tariff on energy products like oil, electricity, and natural gas. In response, Prime Minister Trudeau has confirmed that Canada will impose similar tariffs on U.S. goods.
Additionally, there are plans for another round of tariffs, possibly on March 12, that would include a 25% tariff on all Canadian steel and aluminum imports, adding up to a total tariff of 50% when combined with the earlier tariffs.
More potential trade issues loom, including the possibility of reciprocal tariffs on all U.S. trade partners starting around April 2. These could include a 25% tariff on autos, pharmaceuticals, and semiconductors, with some uncertainty over whether these would be in addition to the March 4 tariffs.
There's also speculation that this trade conflict could push Canadian provinces to ease their own internal trade restrictions, which could benefit Canada’s economy. However, the timing of these tariff measures is fluid and subject to change, with ongoing developments in the U.S.-Canada trade dispute.
With the potential for U.S. President Donald Trump's tariffs on Canadian goods, including steel and aluminum, Canada could face serious economic consequences. If blanket tariffs are implemented, Canada could experience a 2.5% hit to GDP, rising unemployment around 8.0%, and inflation spiking as high as 7.2%. Even if the tariffs are more targeted, the country might still slip into recession.
The big question is how these changes will affect mortgage rates. The Bank of Canada’s main goal is to control inflation, but it has already raised interest rates in the past two years to curb post-pandemic inflation. However, tariffs could drive inflation higher, though the immediate concern will likely be the economic downturn caused by job losses and reduced economic activity.
Despite inflation concerns, many economists are predicting that the Bank of Canada may need to lower interest rates in response to the economic contraction, even without the tariffs fully kicking in. This would have a direct impact on both fixed and variable mortgage rates in 2025. Variable mortgage rates, which are tied to the central bank’s key interest rate, could potentially drop if the Bank lowers rates to stimulate economic growth. Fixed rates, which tend to reflect market expectations, might also adjust based on the anticipated economic situation, although they could remain more sensitive to inflation concerns in the short term.
Overall, while tariffs could worsen inflation, the main impact on mortgage rates will likely stem from broader economic conditions, including the possibility of a recession and job losses, which would push the Bank of Canada to adjust interest rates accordingly.
What are tariffs and who pay them?
A tariff is a tax on goods that are imported or exported. It’s used to protect local businesses, control trade, or raise government money.
When the U.S. imposes tariffs on Canadian goods, U.S. companies importing those goods pay the tax to the U.S. government. But they usually raise prices for customers to cover the extra cost.
The same happens in Canada. When Canada places tariffs on U.S. goods, Canadian companies pay the tax to the Canadian government and often pass the higher cost onto consumers, meaning Canadian shoppers end up paying more.
In short, it's the consumers who end up paying for the tariffs through higher prices.
"US Tariffs with no retaliation would mean more easing by the Bank of Canada and wtih material retaliation by Canada could thwart easing and possibly even bring back policy tightening" Derek Holt, vice president and head of capital markets economics at the Bank of Nova Scotia.
Variable Mortgage Rates and Flexibility During Tariff Uncertainty
The potential benefits of variable rates: Variable mortgage rates, which are tied to the Bank of Canada’s (BoC) interest rate, offer flexibility, especially in uncertain times like those created by tariff threats. If tariffs are imposed, the BoC may need to lower interest rates by 0.50% to 0.75% (50-75 basis points) to support a weakened economy. This would likely result in lower variable mortgage rates, which could save homeowners money through reduced payments or shorter loan terms if they have fixed-payment variable mortgages.
The economic impact of tariffs: The threat of tariffs alone is causing market instability, raising concerns about Canada's economic growth. If the BoC cuts interest rates to counteract the effects of tariffs, variable mortgage rates could decrease more than initially expected, leading to potential savings for homeowners who choose this option.
Could the BoC raise rates to fight tariff-induced inflation? While the BoC's primary goal is to control inflation (targeting 2%), the tariffs could increase costs for businesses, which may push inflation higher. However, raising rates to combat inflation in a weakened economy could deepen the recession. In this case, the BoC may focus more on supporting the economy than fighting inflation, even though inflationary pressures from tariffs and supply chain disruptions could limit the BoC's ability to cut rates as needed.
The effect of job losses on inflation: Job losses may reduce demand, leading to temporary price reductions for certain goods due to increased competition and excess supply. However, supply chain disruptions and rising business costs would likely lead to higher prices, especially for energy, as the U.S. depends heavily on Canadian crude oil.
When might interest rate cuts happen? Trump's trade policies may have influenced the BoC's decision to cut rates in December 2024, in anticipation of economic challenges ahead. By January 2025, the BoC continued to reduce rates to 3.0%, and further cuts could happen if tariffs are fully implemented. The BoC might even make cuts between scheduled meetings if the economy worsens rapidly.
Managing inflation pressures: While the BoC could pause rate changes to manage inflation from increased demand, several other inflationary factors, such as a lower Canadian dollar and rising U.S. inflation, could complicate decisions. With the economy still struggling from previous rate hikes, more increases in rates seem unlikely in the short term.
In summary, the threat of tariffs is likely to lead to lower variable mortgage rates, offering flexibility and potential savings for homeowners. The BoC is more focused on supporting the economy than raising rates, but inflation pressures from tariffs could complicate its decisions.
Fixed Mortgage Rates: Stability During Economic Changes
Fixed mortgage rates are influenced by the bond market, not directly by the Bank of Canada’s interest rate changes. They reflect where rates are expected to go based on market conditions. This makes fixed rates a safer choice for homeowners who prefer stability, especially during times of uncertainty.
Impact of tariffs on fixed rates: The 5-year fixed rate was expected to stay steady, factoring in possible rate cuts. However, if tariffs cause market anxiety, investors may seek safer Canadian government bonds, driving bond prices up and yields (and fixed rates) down. If the Bank of Canada cuts rates to help the economy, fixed rates could drop further but would still be higher than variable rates.
Tariffs and fixed rates: Unlike variable rates, which change regularly with the Bank of Canada’s decisions, fixed rates are more affected by market fluctuations. Ongoing tariff threats could cause bond yields to move, leading lenders to adjust fixed rates.
Will tariffs increase fixed rates? Tariffs could cause higher costs (inflation), but the bond market may still expect the Bank of Canada to lower rates, which would likely cause fixed rates to decrease.
Could inflation raise fixed rates? Yes, if inflation rises in early 2025, fixed rates might go up temporarily. However, if tariffs disrupt trade, expectations of rate cuts could push fixed rates down.
In short, fixed mortgage rates are stable but can be affected by economic changes like tariffs. They could go up with inflation, but tariffs could lead to lower rates if the Bank of Canada cuts interest rates.
End Thoughts
If tariffs don’t happen:
We’ll continue monitoring inflation and other factors. Hopefully, the Bank of Canada will lower interest rates further this year. How much they cut will depend on how much they need to boost economic growth, especially with the U.S. economy growing stronger.
If tariffs are fully implemented:
If tariffs come into full effect, they could change the economic outlook for 2025 and beyond. In this case, lower interest rates are likely to follow soon after. Currently we are seeing the fixed rates drop and the space between for variable and fixed, is still more favourable to fixed rates.
If tariffs fall somewhere in between:
If not all goods are hit or if tariffs are less than expected, we’ll need to assess the situation month by month. The Bank of Canada’s decisions will depend on how the economy adjusts to this uncertainty while still recovering from earlier rate hikes.
In this scenario, the Bank of Canada will face a tricky balancing act: keeping inflation in check while encouraging healthy consumer spending.
Got Questions? I know I did! Reach out today!
.jpeg)
Comments
Post a Comment