A fresh round of Canada-U.S. tariffs has put mortgage rate watchers on alert. After negotiations broke down over the weekend, approximately $20 billion of Canadian exports to the United States were hit with 50% US tariffs. Prime Minister Mark Carney has said Canada will respond dollar for dollar, announcing retaliatory tariffs on Tuesday, covering approximately $27.6 billion of US products, scheduled to take effect on September 8.
So, what does this mean for your mortgage?
Could rates rise because tariffs make everyday goods more expensive? Or could they fall because weaker exports and business activity slow the Canadian economy?
The honest answer is that tariffs can create pressure in both directions.
The Bank of Canada’s Difficult Decision
Tiff Macklem is facing one heck of a predicament. As governor of the Bank of Canada, his primary objective is to ensure the economic and financial welfare of the country. This involves protecting our economy while keeping inflation in check. He does this using one giant control knob: Interest rates.
Right now, he’s facing two giant problems at the same time, but turning the knob to fix one will actually make the other one worse.
Problem 1: Economic Slowdown
The trade war between Canada and the US is kind of like two kids threatening to take each other’s toys away. The US is slapping Canada with additional tariffs on their exports to the US. This makes Canada a less attractive trading partner, resulting in Canadian businesses selling less to the US, which negatively impacts our economy.
Weaker exports can slow business activity, hiring, and consumer confidence. If the economy weakens enough, that can reduce pressure on the Bank of Canada to hike rates… and in a deeper slowdown, it could eventually support rate cuts. Lower rates make it easier for people to spend money, which in turn drives our economy.
Problem 2: Inflation
On the other side, tariffs are like a tax on consumers. Businesses have to pass this additional cost on to consumers, driving up prices and fuelling inflation. Higher import prices, Canadian retaliation, supply-chain disruptions, and pressure on the Canadian dollar can all keep inflation hotter than the Bank would like. To fight inflation, the Bank of Canada would need to increase its rate to control consumer spending.
This puts Macklem in a tough position and puts him in a bit of a trap:
If he lowers rates to protect jobs and stimulate the economy, then inflation would rise.
If he raises rates to control inflation, then the economy will suffer, leading to higher unemployment.
So, what does he do?
The Two Competing Pressures
1. Slower growth could help variable-rate borrowers later
Canada depends heavily on trade. If U.S. tariffs reduce Canadian exports, some businesses may sell less, invest less, and hire less. If that weakness spreads, the Bank of Canada may become more worried about supporting the economy than cooling it, leading to a rate cut.
That would usually be good news for variable-rate borrowers… eventually.
As of today, the Bank of Canada’s overnight rate is 2.25%, which is what banks use to set their prime rates, currently at 4.45%. The current expectation is that this rate will remain unchanged for the remainder of the year.
So yes, tariffs could reduce pressure for future hikes. But a weaker economy does not automatically mean mortgage rates will fall.
2. Inflation pressure could keep fixed rates jumpy
Tariffs can also work the other way by pushing costs higher.
If imports cost more, some of that gets passed on. Add retaliation, possible supply disruptions, and currency pressure, and inflation can stay sticky even while growth slows.
That is the risk people mean when they mention stagflation. In plain English: the economy softens, but prices keep rising anyway. Not ideal… and certainly not fun.
If markets think inflation will stay elevated, bond yields can remain firm or move higher. That can keep fixed mortgage rates under pressure even if the Bank of Canada stays on hold.
So which side wins… weaker growth or higher inflation? That is exactly the problem. Markets are weighing both at once.
Three Short Scenarios from Here
1. The conflict eases
If negotiations restart and tariffs are reduced, markets may calm down. That could help bond yields settle and reduce inflation fears. In that case, fixed rates could improve, and variable rates could stay stable or move lower later if the economy still needs support.
2. The conflict continues
This is a strong possibility. Tariffs stay in place, growth slows somewhat, and inflation stays uncomfortable but manageable. In that setup, the Bank of Canada may remain on hold, variable rates may stay fairly steady, and fixed rates may keep bouncing around with each new headline.
3. The conflict escalates
If tariffs broaden or the economic damage gets worse, the Bank of Canada could eventually lean toward cuts, which would help variable rates.
This would also lead to bond yields falling, which would put downward pressure on fixed rates.
But if inflation also stays stubborn because of retaliation, supply issues, or currency weakness, fixed rates could remain volatile.
How Will the Latest Tariffs Affect Mortgage Rates?
It can be tough to tell how the bond market will react to tariffs. Does it see it as driving inflation, in which case it would react with an upward swing?
Or does it look at it as a threat to our economic well-being, and react with downward movement?
Following last weekend’s breakdown in negotiations, we saw a respectable drop in bond yields on Monday and Tuesday of this week. Not enough for lenders to reduce their rates… but enough to relieve the upward pressure on fixed rates that I was referring to in last week’s blog.
If the yields continue to drop, then fixed rate reductions can be expected… however, the yields have bounced up today by more than 1.50% at the time of writing this blog. Still below their recent peak reached Friday, which was their highest point since May 2024.
We’re of course hoping for bond yields to drop further… but I certainly wouldn’t count on it. The only way to guarantee yourself the lowest mortgage rate is to get something locked in ASAP. If rates drop then we can still get your rate lowered for you. If they rise, then you’re protected. You win in either case.
Reach out to us today to find out the lowest mortgage rates you’ll be eligible for.
Frequently asked questions
Will the tariff war immediately increase Canadian mortgage rates?
Not necessarily. Variable rates are tied mainly to the Bank of Canada overnight rate and prime rate, while fixed rates react more to bond yields and inflation expectations. That means fixed rates can move even if variable rates do not.
Could tariffs lead to lower variable mortgage rates?
Yes, but only if the economic damage becomes serious enough to push the Bank of Canada toward cuts. Right now, the base case is still that the overnight rate stays at 2.25% through the rest of 2026.
Why might fixed mortgage rates stay high or rise?
Because fixed rates follow the bond market more closely than the Bank of Canada. If tariffs keep inflation risks elevated, bond yields can stay firm and fixed pricing can remain under pressure.
What should I do if I’m buying, closing, or renewing soon?
Focus on your timeline and risk tolerance, not just the headlines. If you need a mortgage soon, compare options early and don’t assume waiting will produce a better rate.
Final Thoughts
The latest Canada-U.S. tariff fight still points in two directions at once. Weaker growth could reduce pressure for future Bank of Canada hikes, while higher import costs, retaliation, supply disruptions, and currency pressure could keep inflation elevated and fixed mortgage pricing volatile. For now, the clearest outlook is still for the BoC rate to remain unchanged for the remainder of the year, fairly stable variable pricing, and more uncertainty on the fixed side.
If you are buying, closing, or renewing soon, don’t make a major mortgage decision based on one headline… or one hopeful prediction. Reach out to us today for some friendly advice and high-level guidance on your best options and lender comparisons. We’ll explain the trade-offs in plain English and help you build a smart strategy around your real numbers while delivering the WOW experience PMT Mortgage is known for.
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