In its first cut of 2025, the Bank of Canada (BoC) lowered its key interest rate by 25 basis points.
On Wednesday, the country’s central bank announced it had reduced the policy rate from 3.25% to 3%.
The BoC acknowledged that its January monetary projections are “subject to more-than-usual uncertainty” due to US President Donald Trump’s tariff threats but clarified that it did not factor into the interest rate cut.
“Since the scope and duration of a possible trade conflict are impossible to predict, this [Monetary Policy Report] provides a baseline forecast in the absence of new tariffs,” reads the announcement.
The bank projects that the global economy will grow by about 3% over the next two years. In Canada, it predicts that the recent strengthening in consumption and housing activity will continue while business investment will remain weak.
The BoC also forecasts GDP growth of 1.8% in both 2025 and 2026 but says the possible trade conflict with the US could weaken that and lead to higher prices in Canada.
“Lower interest rates are boosting household spending and, in the outlook published today, the economy is expected to strengthen gradually and inflation to stay close to target,” reads the announcement. “However, if broad-based and significant tariffs were imposed, the resilience of Canada’s economy would be tested.”
What does all of this mean for Canadians? Experts weighed in on the impact of interest rate cuts on housing and finances and the looming tariff threat.
Mortgage rates and housing
Phil Soper, president and CEO of Royal LePage, says the BoC interest rate cut is good news for homebuyers and some mortgage holders.
“[It] will further increase borrowing capacity for homebuyers and benefit mortgage holders whose loans are coming up for renewal,” he explained in an email to Daily Hive.
“This latest decrease arrives just before the spring housing market – when demand typically picks up – which should spur buying and selling activity in the weeks ahead.”
Ratehub.ca mortgage expert Penelope Graham says the rate cut will lower Canada’s prime mortgage rate to 5.2% at most Canadian lenders.
“Those who currently have a variable mortgage rate will see either their monthly payment lower if they have an adjustable-rate mortgage, or the portion of their payment servicing interest costs decrease if they’re on a fixed payment schedule,” she explained in an email to Daily Hive.
According to Graham, fixed mortgage rates are set to decrease slightly as bond yields have dipped down to the 2.8% range following the BoC announcement.
“However, bond investor concerns over future inflation growth – due to threatened tariffs and a potential economic downturn – have kept a floor under yields since late last year, within the 2.8-3% range. Until this changes, there won’t be any dramatic discounts for fixed mortgage rates,” she added.
According to Ratehub.ca’s mortgage payment calculator, a homeowner who put a 10% down payment on a $676,640 home with a five-year variable rate of 4.45% amortized over 25 years (total mortgage amount of $627,854) has a monthly mortgage payment of $3,458.
The home price used in this example is the Canadian Real Estate Association’s December 2024 average.
With Wednesday’s 25-basis-point rate decrease, the homeowner’s variable mortgage rate will decrease to 4.20%, and their monthly payment will decrease to $3,371. This means the homeowner will pay $87 less monthly or $1,044 less yearly on their mortgage payments.
Whose finances will this affect, and how?
Graham says that while the BoC interest rate cut is good news for borrowers, it’s not so good for passive investors and savers.
“With today’s 25 basis point interest rate cut, savings and investing products, which are based on lenders’ prime rates, will see their rate of return drop at a faster pace,” she explained.
“Products such as GICs, which offer a guaranteed return over a set period of time, can provide Canadians with some peace of mind, if they’re concerned about how potential tariffs will impact their investments.”
Factoring in looming tariff threats
Both Soper and Graham predict more interest rate cuts from the BoC amid the uncertainty of US tariffs.
“We believe the Bank of Canada’s focus will be a decided shift from an inflation battle to avoiding an economic downturn,” said Soper. “A recession resulting from a tariff tit-for-tat could prompt additional cuts in the short-term to stimulate the economy.”
Graham says the BoC “has made it clear that it will do what’s necessary to maintain price stability, which will likely mean lower interest rates to counter the effects of tariffs.”
Soper adds while Canada’s housing market would be “insulated” for the most part from the trade conflict, “economic challenges could eventually cause activity to slow.”