Trump Is In - What Does This Mean For Interest Rates

Jan 233 min read

January 23rd, 2025

Donald Trump's 2025 Inauguration: Impacts on Canada

Donald Trump has been sworn in as the 47th President of the United States.

Not good news for the Canadian economy, but surprisingly, it could be good news for those of you with variable-rate mortgages.

U.S. Tariffs on Canada: What to Expect

Come February 1st, we might see American tariffs introduced. What does this mean for the Canadian economy as a whole?

Well, to put it bluntly, it's bad news.

Any tariff percentage is essentially a tax on our goods and services. Yes, we will raise prices to combat these increases, but Canadians will still feel the impact.

In other words, if they add a 25% tariff, we'll likely respond by adding 25% to the price of the goods and services we sell. It might seem like a wash, but in the long run, this only hurts the party more dependent on the trade relationship. In this case, Canada, particularly for energy sales to the United States.

Job Losses Due to Tariffs

Aside from raising prices, tariffs can have other effects, like reducing the workforce due to increased costs. Doug Ford's government in Ontario estimates that the province alone could lose up to 500,000 jobs because of these tariffs.

500,000. That's a lot.

And that's just Ontario. Every other province will likely feel similar repercussions.

Economic Outlook for Canada

Nobody knows for sure how this will play out for the Canadian economy long-term, but the outlook is negative.

In other words, we'll likely see interest rates continue to fall.

Why?

The Bank of Canada has many objectives, one of which is to monitor the economy through Gross Domestic Product (GDP) to ensure Canada continues to grow and prosper. One way they do this is by adjusting interest rates.

They make sure rates aren't too high to avoid economic stagnation and not too low to prevent major long-term inflation.

So, if the Canadian economy slows because of tariffs, the Bank of Canada has one choice: lower, lower and lower again.

Impact on Variable Rate Mortgages

This means your variable rate mortgages are set to continue decreasing. They'll go down because of these Bank of Canada adjustments; changes from the Bank of Canada directly affect variable rates.

However, for those who like fixed rates, you might not see that same relief. Fixed rates are connected to Canadian bond yields.

You might be asking yourself, "What happens if we don't see those tariffs on February 1st?" For me, it would be a big sigh of relief. But it likely won't mean we're out of the woods just yet.

Long-Term Effects of Tariff Threats

Trump has hinted at these measures to push Canada to secure its borders and reduce the trade surplus we currently hold with the U.S. This means tariff threats might remain ongoing, at least until Trump leaves office in 2028.

That's a long time.

In other words, it's more likely than not that the Bank of Canada will be forced into measures they'd rather avoid but will probably have to implement.

As for Canada, let's hope the federal government can weather this storm and start building the necessary infrastructure so we're not so reliant on the United States for trade, especially for oil.

TL;DR:

Trump's Tariffs: U.S. tariffs could hit Canada on Feb 1st, negatively impacting the economy and potentially leading to job losses (up to 500,000 in Ontario alone).
Mortgage Rates: Variable rate mortgages are likely to decrease further as the Bank of Canada might lower interest rates to stimulate a tariff-hit economy.
Economic Strategy: Canada needs to reduce reliance on U.S. trade, especially in energy, to weather potential long-term tariff impacts under Trump's administration.