Making sense of the Bank of Canada interest rate decision on January 29, 2025

This has considerably eased borrowing costs for Canadians, especially mortgage rate shoppers. However, it’s uncertain how much more interest relief is on the way, as threatened 25% U.S. import tariffs—which could take effect on February 1st—have skewed the rate and economic outlook for Canada.

In its announcement accompanying the rate cut, the BoC’s Governing Council writes that its current outlook is “subject to more-than-usual uncertainty.” It added that should tariffs on Canadian goods in the U.S. be implemented, the “resilience of Canada’s economy would be tested.”

However, the BoC can’t dictate rate policy based on hypotheticals. It works with the current hard data available. Based on recently released statistics, including jobs numbers and December 2024 inflation (1.8%), the central bank states that today’s quarter-point cut was warranted.

Assuming trade tariffs don’t materialize, Canadians can now expect the cadence and size of rate cuts to slow this year. The central bank says its previously-implemented cuts are working, and that less stimulus is needed moving forward. Based on a no-tariff scenario, economists are largely calling for the BoC’s rate to fall to a range between 2.5% to 2.75% by the second half of 2025. And that will likely be carried out in two to three more rate cuts.

But what if tariffs do happen?

Unfortunately, it seems most likely that tariffs, at least in some form, will indeed be implemented in the near future. President Donald Trump gave a Feb. 1, 2025 date once he came into office. To provide some guidance as to how these may affect the economy, the BoC included a theoretical analysis in its January Monetary Policy Report, which was released this morning alongside the rate announcement.

“Given the uncertainty around future global tariff policies at this time, the Bank has chosen a simple scenario to illustrate how the global and Canadian economies could be affected by a trade conflict,” it reads.

The scenario assumes: 

• The U.S. imposes permanent 25% tariffs on all the goods it imports, including Canadian ones.

• Canada will retaliate with tariffs of our own, slapping 25% on goods imported from the U.S.
• The financial impact of tariffs, while initially low, will increase over time, all while business profit margins will be reduced.
• Half of the tariff revenue raised by each country, including Canada, is transferred back to households, while the remainder is used to pay down debt.

Should this play out, the BoC expects the average annual gross domestic product (GDP) growth to be 2.5 percentage points lower during the first year of tariffs, compared to a non-tariff scenario, and 1.5 percentage points lower in the second year, before normalizing in year three. 

In a non-tariff scenario, the BoC forecasts Canadian GDP will grow by 1.8% in 2025 and 2026, following a total increase of 1.3% in 2024. Inflation would also evolve close to its 2% target over the next two years.

However, tariff-induced price increases and a depreciating dollar would put the boil back under inflation growth, which the BoC has only recently clawed back to a sustainable 2% target. The measure had run rampant, hitting a high of 8.1% in June 2022, following the end of pandemic lockdowns.

“A long-lasting and broad-based trade conflict would badly hurt economic activity in Canada. At the same time, the higher cost of imported goods will put direct upward pressures on inflation,” stated BoC Governor Tiff Macklem in the press conference following the rate announcement today. “Unfortunately, tariffs mean economies simply work less efficiently, we produce and earn less than without tariffs.”

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Rising stagflation fears

The implementation of tariffs would also put the BoC in the difficult position of having to balance rising inflation—which typically warrants rate hikes—with an economy mired in recession—which requires rate cut stimulus. The result is stagflation. That’s when a country’s inflation skyrockets without the usual economic growth factors, amid steep job losses. 

In that scenario, the BoC would be most likely to pass along more rate cuts—potentially another full percentage-point-worth, according to analysis by BMO economists. An economic note titled “25% Tariffs: What If” authored by Douglas Porter and Robert Kavcic, calls for the Bank to slash its overnight rate as low as 1.5%. However, such low interest rates would be cold comfort for Canadians losing their jobs en masse.

Another wildcard facing the BoC is its divergence with its American counterpart, the U.S. Federal Reserve. While the BoC has been on a steady cutting path, stubborn U.S. inflation and GDP growth have given the Fed little incentive to reduce its own benchmark Federal Funds Rate (FFR). It kept this rate unchanged in its own announcement on January 29. Usually, the two central banks move in tandem on rate policy, as deviating too far—more than 1 percentage point—below the Fed’s rate puts pressure on the loonie, and is also inflationary. As of these most recent rate announcements, Canada’s benchmark rate now sits 1.33% lower than the U.S. Fed’s 4.33% FFR.

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What does the BoC rate announcement mean to you?

What does this most recent rate cut mean for your mortgage, finances and investments? Read on to find out.

The impact on Canadians with a mortgage

In the short term, at least, this most recent rate cut is positive for mortgage borrowers, whether they’re shopping the market for a new mortgage, or looking to renew their existing mortgage term. With the benchmark rate now 2% below its 5% peak, that’s considerably lowered borrowing costs and taken the pressure off existing borrowers, who will be forced to renew at rates higher than what they took out during their all-time lows in 2021 and 2022.

The impact on variable-rate mortgages

This latest rate cut most directly impacts those with variable-rate mortgages. Those who have an adjustable-rate variable mortgage will see their monthly payment lower immediately. Those who have a variable mortgage but are on a fixed payment schedule will now see more of their payment go toward their principal balance, rather than servicing interest costs.

The impact on fixed-rate mortgages

Fixed mortgage rates, while not directly mandated by the BoC, are certainly influenced by its rate direction. This is because fixed-rate pricing is based on what’s happening in the bond market. And bond investors tend to react favourably to central bank rate cuts, even when they’re already priced in by the market. Following this morning’s announcement, the government of Canada five-year bond yield lowered down to the 2.8% range, its lowest level since December 10, 2024. 

Lenders are expected to pass on some discounts as a result. However, there won’t be any drastic downward swings; investor fears over the impact of tariffs and expectations that inflation will remain higher longer term have kept five-year yields trapped in a holding pattern between 2.8% to 3.1% since late last year. Until something happens to ease those concerns, it’s unlikely we’ll see much more downward movement in the bond market, or in fixed mortgage rates.

Check out the rates below to see the current status of mortgage rates in Canada.

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What does this mean for the housing market?

This latest rate cut will likely continue to juice housing market demand, which had started to heat back up in the latter months of 2024. Many would-be home buyers had remained on the sidelines over the course of the first half of the year, as interest rates remained elevated. Now that they’re coming down—and home prices have yet to pick back up—many real estate boards, including the Canadian Real Estate Association (CREA), expect a brisk early spring selling season.

In its most recent housing forecast update, CREA states, “The assumption remains that the combination of two and a half years of pent-up demand and lower borrowing costs, together with the usual burst of spring listings will lead to a rebound in market activity across the country in 2025. There was a good preview of what that might look like during the fourth quarter of 2024.”

Of course, this comes with the same caveat of whether incoming tariffs will chill purchasing power—a likelihood, if job losses mount.

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What does the rate cut mean if you’re an investor?

Markets have been burdened both by tariff uncertainty this week, as well as swings in the tech and AI sectors. But this morning’s rate cut helped with sentiment. As of this morning, the S&P/TSX composite had increased 76.13 points at 25,495.58. Meanwhile the Canadian dollar slid slightly further, trading for 69.26 cents U.S. compared with 69.47 cents U.S. on Tuesday.

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What does the rate cut mean for your savings?

While rate cuts are great news for mortgage borrowers, it’s not such a great outcome for savers, whose account rates are also based on lenders’ prime rates. This cut will further lower the rate of return for those with high-interest savings accounts (HISAs) and guaranteed investment certificates (GICs). However, given there are more cuts anticipated, those shopping for these products are wise to lock in now, before rates fall even further, and there are still attractive deals to be had. Thankfully some still have rates higher than inflation, saving some value for that locked-in cash.

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Read more about interest rates:

• The best variable mortgage rates in Canada
• The best variable mortgage rates in Canada
• The best GIC rates in Canada
• Bonds vs. GICs: Where should you invest your fixed-income dollars?

About Penelope Graham

As director of content at Ratehub.ca, Penelope has over a decade of experience covering real estate, mortgage and personal finance. Her commentary is featured on BNN Bloomberg, CBC and The Globe and Mail.

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