Estimated reading time: 3 minutes
John Rapley, a distinguished author and academic, splits his time between London, Johannesburg, and Ottawa. His notable works include “Why Empires Fall” (Yale University Press, 2023) and “Twilight of the Money Gods” (Simon and Schuster, 2017).
Recently, a pivotal policy announcement from the central bank has stirred anticipation about Canada’s economic direction, especially concerning interest rates in 2025. Interestingly, this development did not originate from Canada’s central bank but rather from the U.S. Federal Reserve.
Following its recent decision to cut interest rates, Fed Chair Jerome Powell indicated a shift to a more cautious approach to rate reductions, suggesting higher inflation and, consequently, higher interest rates in the coming year than previously forecasted. This shift, with its potential to significantly influence the interest rate landscape in Canada and the mortgage rate forecast for 2025, underscores the need for vigilance and preparedness in navigating the uncertain economic terrain.
The Fed has been cutting short-term rates for some time, asserting that inflation is under control. However, skeptical of this stance, bond investors have been selling bonds, driving up long-term rates. The Fed’s latest move acknowledges these market signals, and its gaze is now firmly set on potential inflationary pressures from proposed U.S. policies.
This strategic pivot holds considerable implications for Canada, particularly as it navigates this delicate time. While major global economies are experiencing slow recoveries, Canada, Europe, and China are easing their monetary policies aggressively. Conversely, the U.S., Britain, and Australia are adopting a more cautious, watch-and-see approach, with Japan increasing its interest rates. These divergent policies, especially with potential changes in interest rates in Canada, could complicate domestic economic management efforts.
For Canada, the ripple effects of global capital market dynamics are particularly poignant. Since the Bank of Canada became the first G7 central bank to cut interest rates in June, reducing its target rate significantly, the yield on a 10-year Canadian government bond has started to follow U.S. rate trends upward. Despite Canadian bonds offering lower yields than their American counterparts, investor capital has been migrating southward, exerting downward pressure on the Canadian dollar. This scenario, with its potential to pose significant challenges for Canadian economic management, underscores the gravity of the situation as mortgage rate forecasts for 2025 could be influenced by these shifts.
Due to Canada’s reliance on U.S. imports, such currency weakening risks elevating inflation. Additionally, it could exacerbate trade tensions with the incoming U.S. administration, particularly under President Donald Trump, who desires an increase in Canadian imports of American goods. Meanwhile, rising interest rates, with their potential to stifle economic recovery efforts, underscore the urgency of the situation, as evidenced by the cooling of Canada’s housing market after initial signs of recovery following rate cuts.
Analysts project modest growth for the Canadian economy next year, with estimates ranging from 1 to 2 percent. These forecasts, however, assume continued fiscal expansion by the Trump administration, bolstered by tax cuts. Yet, with the Fed possibly preparing to counter the inflationary impact of these policies through tighter monetary measures, the economic outlook for 2025 could shift dramatically, impacting both interest rate forecasts and mortgage rates.
Should the Fed tighten its monetary stance, President Trump may join many politicians in criticizing central banks for perceived hindrances to economic growth. This situation could complicate matters for the Bank of Canada, which may need to balance its policy direction amid these changing conditions. Furthermore, the Canadian government may face the challenge of addressing U.S. concerns amid a potentially weakening loonie.
As we look ahead to the interest rate landscape of 2025, these evolving dynamics underscore the importance of strategic foresight and adaptability in managing Canada’s economic future.
