Highlights :

• Canadian mortgage rates have held steady amidst a volatile bond market.
• Economic growth patterns are being driven by tariff avoidance in the first quarter, but signs of slowing are emerging.
• The Bank of Canada remains on hold, but we expect rate cuts to resume in July.

Mortgage Rate Outlook

Canadian interest rates have been under upward pressure since April as a mix of global and domestic factors push rates higher. A chaotic approach to trade policy in the United States has prompted some investors to lose confidence in the US. The resulting outflow of capital, and a need for the US to ramp up borrowing due to the impact of extending nearly $4 trillion in tax cuts on an already substantial deficit, has pushed US bond yields higher in recent months. Canadian interest rates have been pulled higher alongside rising US rates and by shifting expectations toward a steady Bank of Canada policy rate due to a somewhat brighter outlook and hotter-than-expected core inflation.

Amidst a volatile but generally rising yield environment, fixed mortgage rates have held steady. The average five-year fixed mortgage rate offered by Canadian lenders has remained in a range of 4.25% to 4.5%. While we expect fixed rates to fall 15 to 20 basis points by the end of the year as the Canadian economy weakens, global factors could pull mortgage rates higher in the short term.

Variable mortgage rates have fallen significantly over the past year as the Bank of Canada has lowered its policy rate, but now hover close to fixed rates as the Bank of Canada moves to the sidelines. We anticipate the Bank will lower its overnight rate two more times this year, bringing the average variable mortgage rate down to around 4%.

Economic Outlook

The Canadian economy grew faster than expected in the first quarter of 2025 at 2.2% compared to a Bank of Canada forecast of 1.6%. However, growth patterns in North America are still being shaped by tariff-driven behaviour, with US firms ramping up first-quarter imports to stockpile inventory ahead of tariff implementation.

The opposite is expected in the second quarter, with US firms likely to reduce imports. This would lead to a decline in Canadian exports to the US and could cause growth to stall – a pattern already suggested by the sharp drop in exports in April.

We will likely need to wait until the third quarter to get a better indication of the underlying trend in the economy, though we know with near certainty that trade wars are stagflationary – they slow growth and raise prices.

Indeed, signs are emerging that US tariffs are sharply slowing the Canadian economy. The manufacturing sector has lost 55,000 jobs this year and the Canadian unemployment rate is up to 7%, its highest level since 2016 outside of the pandemic. How the economy evolves from here really depends on the state of trade negotiations with the US. The best-case scenario is a definitive resolution to this dispute that involves a roll-back of current tariffs on steel and aluminum and no new tariff announcements. Under such a scenario, we should see a pick-up in economic growth in the third and fourth quarters of this year.

Bank of Canada Outlook

The Bank of Canada has been steadfast in its messaging that monetary policy is not the right tool to fight a trade war, while emphasizing concern about the potential inflationary impacts of tariffs compared to the downside risks to growth. In light of that stance, it is possible that the Bank of Canada, against current market expectations, may opt to hold rates at their current level, which they gauge as the midpoint of a neutral range for the economy. However, we expect that a weakening Canadian economy and a rising jobless rate will eventually outweigh concerns about inflation, prompting the Bank of Canada to lower its overnight rate by 50 basis points by the end of 2025 with the next cut coming in July.

Lower rates are called for by current economic conditions as well as the outlook for economic growth over the medium run. While the Bank chose to leave the estimate of its neutral rate (the level of the overnight rate consistent with long-term equilibrium in the Canadian economy) unchanged during its annual assessment in April, there are good reasons to think it is currently set too high. Falling population growth and a projected but highly uncertain increase in productivity mean that it is very likely that the Bank’s neutral range, which is largely a function of long-run economic growth, could potentially be 50 basis points lower. If so, the Bank’s current policy stance may be tighter than needed to achieve its two per cent inflation target.

Click here to view the full interactive mortgage rate forecast.

Mortgage Rate Forecast (June 2025) by Brendon Ogmundson | Chief Economist | BCREA