The next BoC rate decision is set for Wednesday. The central bank is expected to hold interest rates, given it needs time to understand the impact of the intensifying trade war.Graeme Roy/The Canadian Press
Canada may be embroiled in an escalating trade war with the U.S., but mortgage markets aren’t blinking yet.
Bond yields (which largely determine fixed mortgage rates) and expectations around Bank of Canada interest rate decisions (which directly impact variable mortgage rates) remained relatively unchanged after trade talks broke down last week and new tariffs were announced by both the U.S. and Canada.
Markets still expect a rate hike later this year, and bond yields remain at an elevated level, keeping the lowest five-year fixed rates above 4 per cent.
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The muted response may come as a surprise.
A breakdown in trade talks could negatively affect the Canadian economy in the coming months, raising the prospect of lower fixed and variable mortgage rates as bond yields and central bank interest rates fall, according to CIBC.
Benjamin Tal, deputy chief economist with CIBC, says markets aren’t flinching yet because they’re treating the escalation of tariffs as short-term posturing for further negotiations. Investors believe the current animosity won’t last.
“At this point the market isn’t convinced at all that we’re in a full-scale trade war,” Mr. Tal said.
However, Mr. Tal said the current calm in the market could unravel if there isn’t a trade deal by Sept. 8, when the Carney government’s countertariffs of up to 50 per cent on a wide range of American goods are scheduled to come into force.
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Bond swaps markets, which capture investor expectations around BoC rate decisions, currently expect multiple rate hikes by early 2027. Mr. Tal said the BoC could end up holding rates steady if the trade war persists, and cuts could even be possible if tariffs begin increasing.
A lot could change in the next week or two, he said.
The next BoC rate decision is set for Wednesday. The central bank is expected to hold interest rates, given it needs time to understand the impact of the intensifying trade war.
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