Bank of Canada cuts target interest rate by 0.25% in March 2025 announcement

Costs just eased for borrowers, as the Bank of Canada (BoC) cut its trend-setting interest rate again today, as part of its ongoing response to economic tariff threats.

The central bank lowered its overnight lending rate – which lenders use to set their prime rates and variable borrowing products, such as variable mortgage rates – by another quarter of a percentage point, bringing it to 2.75%. The rate is now down a total of 225 basis points from its peak of 5%; the BoC started lowering its rate in June of last year as Canadian inflation stabilized. As a result of today’s rate cut, the prime rate at most Canadian banks will drop to 4.95%, and variable mortgage rates will also decrease.

Today’s cut – the BoC’s seventh in a  row – was largely expected by markets, with odds topping 85%, mainly due the Bank’s need to respond to continued uncertainty around US trade policy, and Canada’s relations with our largest trading partner. Stock markets have swung wildly in recent weeks, as US President Donald Trump has flip flopped on his promise to implement blanket 25% import tariffs on Canadian imports, with a 10% tariff on energy; after briefly putting them into force on March 4th, they were then further delayed for USMCA-compliant products until April 2nd. (As of today, a separate tariff on steel and aluminum has gone into effect.)

“The Canadian economy entered 2025 in a solid position, with inflation close to the 2% target and robust GDP growth,” states the central bank’s release. “However, heightened trade tensions and tariffs imposed by the United States will likely slow the pace of economic activity and increase inflationary pressures in Canada. The economic outlook continues to be subject to more-than-usual uncertainty because of the rapidly evolving policy landscape.”

“While economic growth has come in stronger than expected, the pervasive uncertainty created by continuously changing US tariff threats is restraining consumers’ spending intentions and businesses’ plans to hire and invest. Against this background, and with inflation close to the 2% target, Governing Council decided to reduce the policy rate by a further 25 basis points.”

A turnaround from rate hold expectations

However, as RBC economists put it in a forward guidance note released on March 10, today’s cut could also be considered a “close call”; prior to March 4th, markets were leaning toward a hold from the central bank, as Canadian core inflation has remained sticky, and GDP performed better than expected in the last quarter of 2024, up 2.6% annually. Once markets got their first official taste of tariffs, though, it became apparent that the BoC would need to add more padding to the economy to counter the fallout. Additionally, a weaker-than-expected jobs report out last Friday further bolstered the chances of today’s cut.

Further rate cuts expected this year

With the threat of tariffs ever-lingering, the BoC is now in a position where it must weigh potential economic damage – which would require further rate cuts – with upsides to inflation, which will be driven higher as tariffs increase prices.

That’s a sticky spot to be in; the BoC aggressively hiked interest rates between 2022 and 2023 to rein inflation back down to its target range of 2%, after it soared upon the re-opening of businesses post-Covid lockdown. Those efforts have been successful, with the Consumer Price Index now below the 2% mark, but the measure remains tenuous; it ticked back up to 1.9% in January, and would have been higher had it not been for the two-month GST holiday implemented by the federal government between December 14th and February 15th.

However, the need to counter the effects of a tariff-induced recession will compel the BoC to cut rates more than it otherwise would; Canada’s big banks are largely calling for it to continue cutting its rate down to the range of 2 - 2.25% by the second half of this year. According to the BoC’s own analysis, a full trade war with the US would lower investment in Canada by 12%, and reduce exports by 8.5% within the first year alone, shaving 3% from our GDP by 2027. Trade with the US accounts for 75% of Canada’s export industry, and one third of its imports.

[E]conomic growth in the first quarter of 2025 will likely slow as the intensifying trade conflict weighs on sentiment and activity,” writes the BoC. “Recent surveys suggest a sharp drop in consumer confidence and a slowdown in business spending as companies postpone or cancel investments. The negative impact of slowing domestic demand has been partially offset by a surge in exports in advance of tariffs being imposed.” 

And, as BoC governor Tiff Macklem stated in a recent speech, central bank rate cuts alone won’t be enough to counter a trade war; they’ll need to work hand-in-hand with fiscal stimulus and targeted supports from the federal and provincial governments. So far, $6.5 billion of financial aid has been pledged by the feds to help companies expand into new international markets and offer favourable loans, in efforts to avoid layoffs.

What does today’s rate cut mean for mortgage borrowers?

Variable mortgage rates

As a result of today’s rate cut, borrowing costs will immediately lower for those with variable mortgage rates, which are priced based on a discount to a lender’s prime rate. Depending on whether they have an adjustable-rate or term with a fixed payment schedule, borrowers will see either their monthly payment, or the amount of their payment going toward interest, decrease.

According to calculations by Ratehub.ca, the average variable mortgage holder will see their mortgage rate decrease to 3.95% as a result of today’s rate cut, and will pay $84 less per month and $1,008 per year on their mortgage . This is assuming they made a 10% down payment on a $670,064* home, and originally had a 5-year variable rate of 4.20%, amortized over 25 years.  Based on this, they would have originally had a monthly payment of $3,338, which has now been reduced to $3,254.

*The average home price in Canada for January 2025 (CREA)

Fixed mortgage rates

While not directly impacted by the BoC’s rate, fixed mortgage rates have been along for the tariff-induced ride, as bond yields – which sets the floor for their pricing – have plunged several times since early February. Most recently, five-year government of Canada bond yields dropped to  2.5% on March 3rd, as markets feared tariffs coming into force. Yields have since ticked back up to the 2.6% range, but that has given lenders the room to discount their fixed mortgage rate products. Currently, the lowest five-year fixed rate in Canada is 3.89% – a low not seen since 2022.

Overall, it seems likely that yields will remain low, as long as tariff uncertainty reigns in the market. Canadian yields are also influenced by the price of American debt, which has also slid in recent weeks; The US 10-year Treasury yield, which acts a global benchmark for debt costs, fell on Monday due to growing recession fears in the US.

For those currently shopping for a mortgage, this translates to the most competitive rates in some time – but market volatility remains a top concern. It’s smart to get an application in swiftly with a lender and secure a rate hold to guarantee access to today’s pricing, even as rates move in recent weeks.

How will today's rate cut impact the housing market?

Tariff uncertainty has thrown cold water on what otherwise would have been a robust early spring market; home buyers are hesitant to buy properties as a potential recession looms, while sellers pile inventory onto an already saturated market. While the most recent national statistics won’t be released until next week, cracks are starting to show in some of Canada’s biggest markets. For example, home sales dropped 27.4% in Toronto in February, putting an end to the  year-over-year price increase trend.

Today’s rate cut will sweeten affordability slightly, and may incentivize would-be buyers to come off the sidelines, but it’s more likely that a chill will remain on the housing market until tariff fears dissipate for good.

How will this impact loans and investments?

This latest rate cut will also lower interest rates for products such as personal loans, car loans, and lines of credit, which are variable-rate products and based on the BoC’s rate. This could provide borrowers with an opportunity – depending on the terms of their loans – to reduce their repayment amounts, or pay off their loans more quickly as more of each payment goes towards the principal instead of interest.

However, it’s not-so-great news for those with prime-based banking products such as high-interest savings accounts and guaranteed investment certificates (GICs) – which will now see their return decrease. However, those who have already locked into a GIC will still enjoy a favourable rate for the remainder of their term, and favourable rates are still available, and given GIC rates are considered a passive “safe-haven” investment, they may provide some solace for investors seeking stability amid today’s uncertain times.

Also read:

• Bank of Canada cuts target interest rate by 0.25% in January 2025 announcement
• Canadian CPI ticks back up to 1.9% in January
• How could 25% US tariffs impact Canadian mortgage rates?
• Tariff uncertainty takes a bite out of Toronto February home sales
• How US tariffs on Canada could impact you – and what you can do