Experts predicts Bank of Canada will hold key interest rate amid trade war with US

According to experts at Ratebub.ca, the Bank of Canada (BoC) will likely hold the key overnight interest rate at 2.25% as the trade war between Canada and the United States intensifies. 

This interest rate is also known as the policy interest rate, key interest rate or target rate, and acts as the benchmark cost of borrowing money in Canada. 

When the BoC chooses to either increase or decrease the rate, it influences the interest rate that lenders use for variable loans, lines of credit and mortgages. 

Most notably, it is an important rate for potential homebuyers because they may get a cheaper loan if this rate is lower. 

Since April 2024, this rate has been slowly cut by the BoC, from 4.75% to the 2.25% it is today. 

Often, the rate is increased when inflation is high to dissuade borrowing and decreased when inflation is down to encourage it. The BoC’s target for inflation in Canada is set at 2%.

Currently the Consumer Price Index (CPI), which indicates inflation, is at 3%, up from 2.8% in June. 

“The Bank of Canada is widely expected to keep its overnight rate unchanged at next week’s September announcement, even as the trade war with the US escalates,” said Jamie David, vice president of mortgages at Ratehub.ca. 

“The Bank is currently in a bind, with escalating trade tensions threatening to slow economic growth, while inflationary pressures weigh against any easing.”

David noted the BoC is likely to hold rates steady as it assesses the broader impact of the escalating trade war on both inflation and economic growth.

For those with fixed mortgages, this means that rates could move in either direction over the coming weeks, with fluctuations depending on how the trade war unfolds. 

“A prolonged conflict that weakens the economy could push bond yields, and consequently fixed mortgage rates, lower as recession concerns grow,” explained David. 

“At the same time, tariff-driven inflationary pressures could push yields and rates higher.”

According to David, there are some discounted options available below the 4% mark, including a two-year fixed mortgage rate of 3.89% and three-year rate of 3.94%. He noted that the lowest five-year fixed rate is currently sitting at 4.09%.

David’s advice for Canadians shopping for a home or approaching a mortgage renewal, is to strategically obtain a rate hold which can provide protection from potential rate increases for up to 120 days. 

For variable mortgages, David predicts that rates will remain largely unchanged in the short term due to his prediction of a BoC rate hold. 

Currently, the best five-year variable mortgage rate is sitting at 3.35%; however, the longer the trade war continues, the greater the chance of future rate cuts.

“As tariffs begin to weigh more heavily on Canadian exports, business investment, employment and overall economic growth, the Bank may need to lower rates to support the economy even with inflation running warm,” he explained. 

David also noted that the escalating trade war could put the housing market recovery back on hold, as the uncertainty and precarious economic situation may prompt buyers and sellers to adopt a “wait-and-see approach.”