What Do Tariffs Have to Do with Canada’s Interest Rates?
While the US has decided to delay the start of some tariffs for another month, Canada is still taking steps to prepare for their impact. Targeted retaliatory tariffs have been placed on American goods like Florida orange juice and Tennessee whiskey, and Ontario Premier Doug Ford has threatened a 25% tax on electricity exports to New York, Michigan and Minnesota.
The cross-border trade war is more than just politics. It’s expected to cause trickle-down effects on the Canadian economy, increasing the cost of goods and potentially putting jobs at risk.
But the battle over tariffs is also having a less obvious impact on the economy here in Canada. It’s influencing the Bank of Canada’s decisions on the policy rate, which both directly and indirectly affect how much Canadians pay for mortgages and other loans.
Bank of Canada Policy Rate Decision
The Bank of Canada announced this week that it’s lowering its policy rate by 25 basis points to 2.75%. This is down from the high of 5% in 2024. According to Bank of Canada Governor Tiff Macklem, “While it is still too early to see much impact of new tariffs on economic activity, our surveys suggest that threats of new tariffs and uncertainty about the Canada-U.S. trade relationship are already having a big impact on business and consumer intentions”.
But why does the Bank of Canada care about tariffs?
By changing its policy rate, the Bank of Canada influences Canadians’ spending by making it more or less expensive to borrow. Lowering interest rates won’t combat tariffs directly, but it will help offset their effects by lowering the cost of borrowing and encouraging Canadian households and businesses to continue spending.
For example, the cost to a business importing goods from the US might go up because of the tariffs. But with today’s policy rate cut, the interest rate on a loan to purchase those goods will probably be lower, so the cost to the business isn’t as high as it would have been otherwise. This means the business doesn’t have to pass as much cost on to consumers.
How Will This Affect Canadians?
Changes in the Bank of Canada’s policy rate affect how much it costs banks to borrow money, which indirectly influences the rates they charge to customers. Families that have an adjustable-rate mortgage will see the change in their payments first, as their payments go up and down with changes in their bank’s prime rate. Fixed-rate mortgage holders will have to wait a little longer to see their payments come down, as their rates stay the same until they renew.
Many Canadians could see their mortgage payments go up this year when their loan is up for renewal, as rates are still higher than they were five years ago when the mortgage was originated. But as the policy rate continues to fall, the increase might not be as bad as it could have been.
It also means business loans will be less expensive, which is helpful for businesses needing to make changes to lessen the expected impact of the tariffs.
Looking Ahead
Desjardins economists expect Canada’s economy to be hit hard by tariffs. The trade war won’t last forever, but it will likely have a lasting effect on business investment, which was already low.
But Canada has faced economic uncertainty before, and the federal and provincial governments are working to end the trade war as quickly as possible. While lower interest rates aren’t the best tool to handle the impact of a trade war, they can help dampen the impacts on Canadian families and businesses.
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