Bank of Canada Slashes Policy Rate to 3%, Shielding the Economy from Trade Uncertainty

The Bank of Canada announced a 25 basis points (0.25%) rate cut on January 29th, 2025, reducing the policy rate to 3% and the prime rate to 5.20%. While unsupported by some rosy economic indicators, this decision was primarily driven by a need to insulate the Canadian economy from the looming risk of a potential trade war with our biggest trading partner, the United States. The threat of US tariffs on Canadian exports weighed heavily on policymakers, prompting the Bank to preemptively support growth despite a moderate uptick in inflation and steady consumer activity.

Economic Context for the Rate Cut

Trade Risks Dominate Policy Decisions

The threat of a 25% tariff on Canadian exports dominated discussions leading up to the Bank of Canada’s decision. Economists warned that such tariffs could reduce Canada’s GDP by up to 3%, tipping the economy into recession. While the US administration’s base case suggested a lesser, universal 10% tariff, this scenario would still strain Canadian industries, particularly manufacturing and energy exports, and weigh heavily on national economic growth.

Reaching the Neutral Rate

The Bank of Canada’s decision to lower the policy rate to 3% has brought it into the estimated neutral range of 2.25% to 3.25%. At this neutral rate, monetary policy neither stimulates nor constrains economic growth. By reaching this threshold, the Bank signalled a transition from a restrictive stance aimed at combating inflation to one that provides more balanced support for economic stability.

However, the decision to cut further despite nearing the neutral rate highlights the Bank’s prioritization of addressing external risks, such as potential tariffs, and fostering resilience in domestic production. Economists suggest that further rate cuts could move into stimulative territory, an area the Bank may reserve for more pronounced economic downturns.

Mixed Economic Signals

Although Canada’s economy added 91,000 jobs in December, structural vulnerabilities persist, and GDP is on track to grow by 2% in Q4. Rising unemployment took a step back in December, reaching 6.7%, and ongoing global supply chain issues limited the recovery’s breadth. Meanwhile, inflation slowed to 1.8% in December, though underlying core inflation remained slightly above the Bank’s 2% target.

Labour Market Trends

Canada’s labour market showed mixed signals leading up to the rate cut. In December, job creation exceeded expectations, but a surge in labour force participation drove unemployment lower to 6.7%. The gap between labour supply and demand underscored underlying economic slack, raising concerns about weak consumer spending and its impact on GDP growth.

Weak GDP Growth and Trade Risks

Economic growth continued to lag, with Q4 GDP expanding by just 0.3%, maintaining a troubling trend of per capita GDP declines. These structural challenges and the possibility of US tariffs on Canadian goods added urgency to the Bank of Canada’s rate cut. Economists estimated that a full 25% tariff could shrink Canada’s GDP by up to 3%, highlighting the potential for long-term economic strain if trade tensions escalate.

Inflation within the Target Range

Inflation remained within the Bank’s 1–3% target range, with the Consumer Price Index (CPI) reaching 1.8% in December. However, the Bank prioritized economic resilience over inflation control, signalling its focus on mitigating trade risks and broader uncertainties that could destabilize growth and free trade.

Explore how these recent changes might influence your mortgage and financial planning.

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 $3,313.82. On every $100,000 balance, your mortgage payment will be $536.16, while your stress-tested mortgage payment will be $653.51.

_{Common mortgage amounts and corresponding mortgage payments on nesto’s 5-year variable low rate of on a 25-year amortization. Qualifying mortgage payment affects all new mortgages, which need to be qualified on stress-tested payment based on the contract rate plus 2% ().}

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

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

Today, Canada’s benchmark home price is $709,200, while a year ago, it was $701,800, which has increased by 0.1%. 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 $3,583.12¹ to $3,105.61². This implies that nationally, the average insurable mortgage payment decreased by 13.33% from a year ago. In comparison, during that same period, Canada’s average national rent decreased by 2.7% from $2,115.14 to $2,088, which in dollars is $27.14 year-over-year.

TL; DR— Canada‘s monthly mortgage payment decreased by 13.33%. Meanwhile, average home prices increased by 0.1%, and average national rents have decreased by 2.7%. In dollars, mortgage payments have decreased by $477.52, average home prices have increased by $3,800, and average national rents have decreased by $27.14.

_{*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.}

Implications for Canadian Homeowners and Homebuyers

Benefits for Variable-Rate Mortgage Holders

Variable-rate mortgage (VRM) holders should expect an immediate reduction in their interest rates the day after the Bank of Canada’s announcement. For these borrowers, the next scheduled payment will allocate more towards the principal balance and less to the mortgage interest, accelerating mortgage payoff. Adjustable-rate mortgage (ARM) holders will benefit from lower monthly payments, easing financial pressure for households managing rising living costs.

Challenges for First-Time Buyers

While lower rates generally improve affordability, first-time buyers still face hurdles. Stricter mortgage stress tests and limited housing supply remain key barriers, especially in urban markets. Influenced by rising bond yields, fixed-rate mortgage options offered less relief than variable options. Additionally, discounts on new variable-rate mortgages have begun narrowing as potential tariffs introduce new risks to mortgage pricing. First-time buyers weighing affordability must carefully assess whether fixed or variable options align with their financial goals while considering these pricing changes.

Renewal Wave

According to CMHC, approximately 100,000 mortgages are expected to renew monthly in 2025, a significant wave of renewals. Most of these mortgages originated before mid-2022, when interest rates were substantially lower, leaving borrowers facing considerable renewal payment shock. Lenders will likely compete aggressively to retain clients, creating opportunities for borrowers to secure better terms.

Mortgage switches are also anticipated to rise, as many borrowers transferring their mortgages can take advantage of relaxed qualification rules, such as exemptions from the federal stress test. This simplified process allows homeowners to explore more competitive offers and manage affordability during renewal. Comparing rates and considering variable or short-term fixed-rate mortgages can help mitigate rising costs.

Opportunities in Housing Markets

Although borrowing costs dropped, demand for urban housing remained subdued rather than surging. Urban condos, however, retained potential as a long-term investment due to their longer-term supply shortfall in volatile markets such as Toronto and Vancouver. Experts highlighted their affordability relative to detached homes, coupled with a slowdown in new construction, which could eventually tighten supply. These factors position urban condos as attractive options for buyers seeking value appreciation over time.

Final Thoughts

The Bank of Canada’s decision to cut its policy rate to 3% highlights its efforts to shield the economy from external risks and potential trade tariffs. For Canadian homeowners and buyers, this rate cut presents an opportunity to optimize mortgage strategies. Acting now could help you secure better rates and avoid the frenzy expected from sidelined buyers entering the market during the busy spring lending season. Whether considering a variable-rate mortgage for potential savings, preparing for renewal, or refinancing to reduce costs, now is the time to act.

Contact nesto mortgage experts today for tailored advice to help you make the most of your mortgage strategy in the current volatile rate environment and achieve your homeownership goals.

Why Choose nesto

At nesto, our commission-free mortgage experts, certified in multiple provinces, provide exceptional advice and service that exceeds industry standards. Our mortgage experts are non-commissioned salaried employees who provide impartial guidance on mortgage options tailored to your needs and are evaluated based on client satisfaction and advice quality. nesto aims to transform the mortgage industry by providing honest advice and competitive rates using a 100% fully digital, transparent, seamless process.

nesto is on a mission to offer a positive, empowering and transparent property financing experience – simplified from start to finish.

Contact our licensed and knowledgeable mortgage experts to find your best mortgage rate in Canada.

---