After seven straight rate cuts, the Bank of Canada hit the pause button in April and kept its key Prime rate unchanged at 4.95%. As expected, the main reason for the pause is economic uncertainty due to the ongoing trade issues / tariffs that are disrupting the normal flow of goods internationally. There are recent signs that the Canadian economy is slowing. Inflation was lower than expected in March, but this news came in after the bank had factored in its decision making data, and was mainly due to lower fuel costs and travel expenditures. Notably, housing starts were also down year over year.
The Bank of Canada has come up with two possible scenarios. The first scenario assumes most of the tariffs are eventually withdrawn through negotiations, which would stall GDP in the second quarter. The economy then expands moderately, while inflation sinks to 1.5 per cent before returning to their two per cent target.
In the second scenario, the bank assumes the tariffs spark a long-lasting global trade war. In this case, the Canadian economy goes into a significant recession for a year, while inflation spikes to 3.5 per cent in mid-2026. Under this scenario, U.S. tariffs would permanently reduce Canada’s potential output and lower the country’s standard of living. Some exporters could go bankrupt, unemployment would rise and Canadians might have to cut back on their spending under that second scenario.
Given the extreme volatility in the financial markets, lenders face higher costs of funds and therefore, despite past cuts to the Prime Rate, the effective rate to borrowers has remained relatively unchanged.
Fixed rates are also trending slightly upward due to rising bond yields. This “liquidity crunch” is hopefully a short term phenomenon, with some economists still expecting a 0.50% reduction in the Prime rate by year end. The next Bank of Canada meeting is June 4th.
Impact on Mortgage Rates
With another minority government, the Liberals will need to act quickly and decisively to stem the rising frustration that many Canadians feel about housing and the economy. Past promises of rapid housing development have not translated into actual units built and so something new needs to be done. Developers have faced one of the worst markets to bring new homes to market given higher financing rates and economic uncertainty. We hope that the new government will provide some optimism and let builders build without added bureaucracy and by cutting red tape. A fair amount of bureaucratic blame can be put on the provinces and municipalities, but if its true federal leadership to make change, that should hopefully trickle down.
Tough Times = Tough Solutions
Many borrowers are rightfully anxious about the economy and the impact on their mortgages. We offer one on one consultations to help clients navigate their financing options. For those clients who are self-employed, have bruised credit or other extenuating circumstances it can often feel overwhelming. The best way to start is to book a time to chat with us. There are a plethora of options available for most borrowers, regardless of circumstances. Whether buying or looking to improve your financial position, we have options to help.
Mortgage Review
Anytime is a good time to figure out how to get your mortgage paid off faster or consolidate higher interest debt. If you plan on moving, selling or need to know what you need to do to buy that next property please reach out to us and book a time for a chat.
Get In Touch
Have questions? Our trusted team is here to guide you—connect with a 4Front broker today.
