On Wednesday, March 12th, at its regular policy meeting, the Bank of Canada (BoC) reduced its target for the overnight rate by 0.25 per cent, down to 2.75 per cent. This is the seventh rate drop in a row from the BoC (all happening since June) and will cause banks and mortgage lenders to cut their consumer prime rates for customers with variable rate mortgages and lines of credit. With most banks and mortgage lenders, this will mean a drop in their prime rate to 4.95 per cent (5.10 per cent with TD).

For customers with variable rate mortgages where the mortgage payments change with prime (some lenders call these adjustable rate mortgages) this will result in a decrease in mortgage interest costs of about $20 per one hundred thousand of mortgage debt (assuming a 25 year amortization).

Why did the Bank of Canada cut the policy rate?

The short answer is because the escalating tariff war started by the U.S. is pushing Canadian consumers and businesses to pull back on spending, which is expected to have a significant negative short-term impact on GDP. Therefore, the BoC is trimming the policy rate to provide a bit of stimulus to offset the economic slowdown.

The BoC reiterated that coming into 2025 the Canadian economy was in pretty good shape, with decent GDP growth in both Q3 and Q4, inflation close to target, and job growth improving (leading to a decline in unemployment to 6.6% by the end of January). In this context, the BoC feels that it can take pre-emptive action to provide a bit of stimulus to the economy without worrying about causing inflation. 

What’s next for the policy rate?

Unfortunately, there is a significant amount of uncertainty about where the BoC policy rate may go in the coming months. The BoC emphasized that ongoing and increasing tariffs on our exports to the U.S. will lead to significant Canadian job losses, causing a negative impact on inflation (less people spending money causes prices to drop). However, retaliatory tariffs imposed by Canada on goods imported from the U.S. will have a positive impact on inflation (causing prices to rise). And on top of these factors, government actions at the provincial and federal levels to provide stimulus or compensation to the workers or industries most impacted by the tariff war could also be inflationary.

The BoC was careful to state that “monetary policy cannot offset the impacts of a trade war,” meaning it is the responsibility of the government to pass legislation in this regard. Instead, the BoC reiterated that its overriding mandate is to use monetary policy to protect price stability for Canadians. In other words, it will closely monitor how the different factors above influence prices in the coming weeks and will further cut or raise the policy rate as needed to keep prices relatively stable. Reading between the lines, the BoC could potentially find itself needing to raise the policy rate even as job losses pile up and our economy goes into recession, if the import tariffs imposed on U.S. goods are substantial enough to cause prices to rise despite falling demand.

Right now, we anticipate in the short term another possible rate cut by the BoC as it reacts to softening demand, since businesses and consumers are reacting quickly to the negative tariff news. 

However, if the tariff war drags on or escalates through April, the retaliatory tariffs imposed by Canada on U.S. imports will begin to cause price inflation as Canadian businesses are forced to pass on the tariff costs to consumers, significant job losses will begin as our exports decline due to slacking U.S. demand, and government actions will start to impact the economy (i.e. stimulus checks to furloughed workers? Grants or tax relief to auto and steel companies?). This is where things become uncertain, as no one knows exactly when or how much these different factors will influence inflation and the economy.

The next scheduled BoC rate announcement is April 16th, 2025.

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