What the Bank of Canada’s Interest Rate Cut Means for Canadians

Bank of Canada Cuts Interest Rates Amid Economic Uncertainty

In its first rate cut of 2025, the Bank of Canada (BoC) lowered its key interest rate by 25 basis points. On Wednesday, the central bank announced a reduction in the policy rate from 3.25% to 3%.

The BoC acknowledged that its January monetary projections come with “more-than-usual uncertainty” due to U.S. President Donald Trump’s tariff threats. However, the central bank clarified that these concerns did not influence the decision to cut rates.

“Since the scope and duration of a potential trade conflict are impossible to predict, this [Monetary Policy Report] provides a baseline forecast in the absence of new tariffs,” the BoC stated.

The bank projects global economic growth of approximately 3% over the next two years. In Canada, it expects continued strength in consumer spending and housing activity, while business investment remains weak. The BoC also forecasts GDP growth of 1.8% for both 2025 and 2026, though it warns that a trade conflict with the U.S. could dampen growth and drive up prices.

“Lower interest rates are boosting household spending, and in today’s outlook, the economy is expected to gradually strengthen while inflation remains close to target,” the bank’s statement read. “However, if broad and significant tariffs were imposed, Canada’s economic resilience would be tested.”

How the Rate Cut Affects Canadians

Experts weighed in on the implications for housing, mortgage rates, and personal finances, as well as the potential impact of looming tariffs.

Mortgage Rates and Housing

Phil Soper, president and CEO of Royal LePage, sees the rate cut as good news for homebuyers and some mortgage holders.

“This will further increase borrowing capacity for homebuyers and benefit those with mortgages coming up for renewal,” Soper told Daily Hive via email.

The timing is significant, arriving just before the spring housing market, a period of heightened real estate activity. The rate cut is expected to encourage both buying and selling in the coming weeks.

Penelope Graham, a mortgage expert at Ratehub.ca, noted that Canada’s prime mortgage rate will likely drop to 5.2% at most major lenders.

“Borrowers with variable-rate mortgages will see their monthly payments decrease if they have an adjustable-rate mortgage, or they’ll pay less in interest costs if on a fixed-payment schedule,” she explained.

Fixed mortgage rates are also expected to decline slightly, as bond yields dipped to around 2.8% following the BoC announcement. However, concerns over future inflation—due to tariff threats and economic uncertainty—have prevented yields from falling further.

“Until there’s more clarity, we’re unlikely to see dramatic discounts on fixed mortgage rates,” Graham added.

Using Ratehub.ca’s mortgage calculator, a homeowner who purchased a $676,640 home with a 10% down payment and a five-year variable rate of 4.45% (amortized over 25 years) currently has a monthly mortgage payment of $3,458. With the new rate cut, their interest rate would drop to 4.20%, reducing their monthly payment to $3,371—a savings of $87 per month or $1,044 per year.

Impact on Savings and Investments

While the rate cut benefits borrowers, it poses challenges for passive investors and savers.

“With today’s 25-basis-point cut, savings and investment products tied to lenders’ prime rates will see lower returns,” Graham said.

Guaranteed Investment Certificates (GICs), which offer fixed returns, may become a more attractive option for Canadians concerned about how potential tariffs could impact their portfolios.

What’s Next? The Tariff Factor

Both Soper and Graham anticipate further interest rate cuts from the BoC as uncertainty around U.S. tariffs lingers.

“We believe the Bank of Canada’s focus will shift from fighting inflation to preventing an economic downturn,” Soper said. “If a tariff war escalates, additional rate cuts could follow to stimulate the economy.”

Graham echoed this sentiment, stating that the BoC is committed to maintaining price stability and will likely lower rates further to counter the effects of tariffs.

While Canada’s housing market is expected to remain relatively insulated from trade tensions, Soper cautioned that prolonged economic challenges could eventually lead to slower activity.