Rate Hold Reflects Balancing Act in an Era of Tariff Tensions

In an environment dominated by heightened uncertainty and geopolitical instability, the Bank of Canada (BoC) held its overnight rate at 2.75% on April 16, reflecting cautious optimism in the face of economic headwinds and inflationary pressures. Despite speculation leading into the announcement, the BoC resisted calls for further cuts, demonstrating prudence as global economic turmoil, mainly emanating from ongoing tariff disputes, continues to impact financial markets and trade relations.

Tariff Troubles Are the Elephant in the Room

The decision comes after US President Donald Trump’s aggressive tariff policies that have thrown global markets into turmoil. In recent weeks, reciprocal tariffs have spiked dramatically, particularly between the US and China, reaching unprecedented levels as high as 125%. These tariffs disrupt international trade flows and significantly increase inflationary pressures by raising costs for businesses and consumers.

The Bank’s decision signals a careful approach, balancing these inflationary impacts against the broader economic risks associated with aggressively reducing rates. Bank Governor Tiff Macklem and his team have concluded that further cuts could exacerbate existing inflation concerns without sufficiently bolstering economic growth.

A Mixed Bag of Economic Indicators

One key reason behind the BoC’s cautious stance is the mixed signals from recent economic data. March’s employment numbers painted a concerning picture: the Canadian economy shed 33,000 jobs, marking the first decline since January 2022. Most concerningly, full-time employment dropped by 62,000 positions, notably in cyclically sensitive sectors like retail and information services. While Ontario, Alberta, and Quebec faced significant job losses, smaller gains elsewhere partially offset this. Despite this, total hours worked, and average hourly wages increased modestly, suggesting resilience within the workforce.

In yesterday’s inflation report, Canada’s Consumer Price Index (CPI) for March surprised many analysts by easing slightly to 2.3%, down from 2.6% in February. This was primarily driven by reduced gasoline prices. However, core inflation measures closely monitored by the BoC remained stubbornly elevated, reflecting underlying cost pressures that continue challenging policymakers.

Confidence and Consumer Sentiment is Shaken but Not Shattered

Business and consumer sentiment indicators further influenced the Bank’s decision. The latest Business Outlook Survey (BOS) revealed deteriorating business confidence, with roughly one-third of Canadian firms now planning around the assumption of an impending recession—double the percentage recorded just six months ago. Investment and hiring plans have been scaled back significantly due to escalating trade tensions, and businesses are reporting more constrained sales outlooks, especially among exporters directly impacted by tariffs.

According to the Canadian Survey of Consumer Expectations, households also feel the pinch. Job security fears intensified in sectors heavily reliant on trade with the US, leading to more cautious spending behaviour. Interestingly, though, Canadian consumer spending has shown some resilience. Despite increased economic uncertainty, sectors such as auto sales and overall consumer spending remain relatively robust. This resilience gave the Bank a reason to pause rather than immediately implement further rate cuts.

Currency and Trade Implications

Surprisingly resilient in recent weeks, the Canadian dollar strengthened somewhat against the US dollar despite initial concerns about its vulnerability during trade tensions. This appreciation helped alleviate inflationary pressures by reducing the cost of imports. Yet, a stronger currency poses challenges for Canadian exporters already navigating tariff disruptions, potentially reducing their competitiveness in critical international markets. The Bank of Canada considered currency dynamics, recognizing that an aggressive rate cut may exacerbate these trade challenges.

The Slow and Winding Path Forward

Despite the BoC’s current hold, future rate cuts remain on the table, depending on how the economic landscape evolves. Policymakers are adopting a cautious, data-dependent approach, closely monitoring trade developments, inflation dynamics, employment data, and consumer sentiment.

Economists remain divided on the trajectory for the remainder of 2025. Some, like TD and RBC, predict cumulative rate cuts of up to 50 basis points by year-end, asserting that the central bank will likely reduce rates further to cushion the economy from the persistent tariff threats and employment weaknesses. Others argue that sustained core inflation and the risk of sparking excessive borrowing and asset bubbles might prevent aggressive monetary easing.

Bond Market Dynamics and Mortgage Implications

A key factor complicating the Bank’s decision-making is recent volatility in the bond markets. Traditionally, US government bonds serve as a safe haven during economic uncertainty. However, Trump’s tariff-induced turmoil has sparked unusual bond market dynamics, with investors shying away from US Treasuries amid fears about American economic stability. This turmoil has increased yields and, by extension, impacted Canadian bond yields, directly influencing fixed mortgage rates.

In recent weeks, the yield on the Canadian 5-year bond—which heavily influences fixed mortgage rates—has experienced significant volatility. After falling sharply, yields rebounded as investors became cautious about sustained inflation pressures from tariffs and uncertainty surrounding global economic stability.

This environment translates into greater volatility in fixed mortgage rates for Canadian homeowners and prospective buyers. While the BoC’s decision to hold steady provides temporary stability for variable mortgage rates, market forces could push fixed mortgage rates higher if US yields continue to rise. Consequently, borrowers are advised to consider locking in rates while they remain relatively favourable.

Long-Term Implications for Housing and the Economy

The US trade-tax turmoil has significantly impacted Canada’s 2025 spring housing market. According to a Royal LePage survey by Leger, nearly half (47%) of prospective homebuyers postponed their purchases due to ongoing US trade disputes.With home sales sluggish and market sentiment cautious, rising inventories, historically low consumer confidence, reduced population growth, and growing tariff-related layoffs suggest downward pressure on property values. However, affordability, driven by wage growth and stable mortgage rates below 4%, provides some market support. These factors suggest a cautious outlook, potentially resulting in softer home prices until trade uncertainties are resolved.

How Bank of Canada Rate Changes Affect Your Mortgage Payments

For example, if you have a $500,000 mortgage secured at nesto’s 5-year variable low rate of , your monthly payment would be $2,639.19. On every $100,000 balance, your mortgage payment will be $527.84, while you’ll be stress-tested on a mortgage payment of $644.31 if you’re looking to purchase a home or refinance your mortgage.

_{Common mortgage amounts and corresponding mortgage payments on nesto’s 5-year variable low rate of on a 25-year amortization. Qualified mortgage payments affect all home purchases and mortgage refinances, and they are qualified on stress-tested payments based on the contract rate plus 2%.}

April 2024 vs. April 2025: What’s Different?

How Has Housing Affordability Changed in the Past Year? Renting vs. Owning

Today, Canada’s benchmark home price is $712,200, while a year ago, it was $727,500, which has decreased by 2.1%. However, the lowest 5-year variable mortgage rate at nesto has decreased from 5.90% a year ago to today. These changes mean that Canada’s average monthly mortgage payment has decreased from $3,714.34¹ to $3,007.41². This implies that nationally, the average insurable mortgage payment decreased by 19.03% from a year ago. In comparison, during that same period, Canada’s average national rent decreased by 1.9% from $2,140.92 to $2,101, which in dollars is $39.92 year-over-year.

TL; DR— Canada‘s monthly mortgage payment decreased by 19.03%. Meanwhile, average home prices decreased by 2.1%, and average national rents have decreased by 1.9%. In dollars, mortgage payments have decreased by $706.93, average home prices have decreased by $15,300, and average national rents have decreased by $39.92.

_{*1 and 2: Values for mortgage payments calculated based on nesto’s variable rate over a 25-year amortization period with a 20% downpayment using the average/benchmark home price in the stated month as reported by CREA for the location.}

Impact on Mortgage Rates and the Housing Market

The Bank of Canada’s decision to hold its overnight policy rate at 2.75% sends a strong caution signal amid rising inflation risks and persistent economic uncertainty. While many mortgage holders had hoped for a rate cut, this pause reflects the central bank’s view that more evidence is needed before further easing monetary policy. For borrowers and homebuyers across the Canadian mortgage market, the effects of this rate hold are mixed and may influence their next financial move.

Rate Pause Brings Stability for Some, Uncertainty for Others

For homeowners with a variable-rate mortgage (VRM) or adjustable-rate mortgage (ARM), today’s announcement brings stability—at least for now. Since these products are directly tied to the BoC’s key interest rate, a pause means no change in monthly payments or amortization structure in the short term. However, the Bank’s hawkish tone suggests rate relief may not come as quickly as some hoped, particularly as core inflation remains sticky and market volatility continues to influence forward guidance.

For fixed-rate mortgages, there’s more movement behind the scenes. Although the BoC’s rate doesn’t directly set fixed mortgage rates, these are closely linked to Government of Canada (GoC) bond yields, which respond to inflation expectations and the economic outlook. Recently, bond yields have increased in response to persistent US Treasury market fluctuations and geopolitical pressures, adding upward pressure on 5-year fixed mortgage rates. This could make locking in a fixed rate more expensive for buyers waiting for rates to fall.

Why Mortgage Strategy Matters More Than Ever

Today’s BoC decision underscores the importance of proactive financial planning for those facing a mortgage renewal or considering a refinance. Holding out for future rate cuts could result in missed opportunities if bond markets continue to price higher long-term risk premiums. In this uncertain interest rate environment, locking in a competitive fixed rate—while still available—may provide peace of mind, particularly for risk-averse borrowers concerned about potential renewal payment shock.

From a broader housing perspective, the Canadian housing market continues to show signs of softness. With inventory levels climbing to multi-year highs, home price growth is expected to remain subdued in most regions, significantly if borrowing costs don’t ease in the near term.

Ultimately, the BoC’s rate hold requires borrowers to adjust their mortgage strategies to today’s conditions. Whether comparing fixed vs. variable mortgage options, reviewing affordability using a mortgage payment calculator, or seeking rate holds on pre-approvals, Canadians need to make the most suitable data-driven decisions using timely mortgage and housing market analysis.

Prudence Amid Uncertainty

The Bank of Canada’s decision to hold rates steady on April 16 highlights prudence in navigating global economic uncertainty. Borrowers must stay proactive in managing financial decisions, closely following economic trends, such as nesto’s mortgage rate forecast and BoC announcements.Ready to navigate uncertain financial waters? Connect with nesto mortgage experts today for personalized strategies tailored to unique financial circumstances – learn how to secure the best mortgage rate for your mortgage renewal, refinance or homeownership journey.

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