Chad Moore Calgary Mortgage Broker

Hey Guys!

Tariffs are here. Now what?

Tiff Macklem, governor of the Bank of Canada, gave a speech in Ontario last week (read that speech here) about anticipated structural changes to Canada’s economy in a trade war.

TL;DR—I have a summary of Tiff’s speech below!

If you’re interested in buying or selling a home, or have a Mortgage renewal coming—pay attention. 

Why?

Because U.S. tariffs, and the Canadian tariff response, will effect the economy.  And changes to the economy will change interest rates.  And around we go. 

I’ve outlined the “structural changes” section of Tiff’s speech, and how monetary policy (I.E., interest rates) might respond. 

Structural Changes To The Economy:

1.  Decline in Exports: Tariffs (export tax) lead to a decline in exports as Canadian goods become more expensive, decreasing demand from the U.S. According to the Bank’s model, exports are expected to fall by 8½% in the year following the implementation of tariffs. This decline results in Canadian exporters cutting production and laying off workers.  

2.  Reduced Household Income and Consumer Spending: Lower export revenues reduce household income, while retaliatory tariffs (taxes on imports) increase the prices of many consumer goods that come into Canada. 
Consequently, consumer spending decreases on various items, with an anticipated decline of more than 2% by mid-2027. 

3.  Decline in Business Investment: Weaker export and consumer demand leads Canadian businesses to cut investment spending. Higher costs and lower profit margins further restrain investment, with an expected decline of almost 12% by early 2026. 

4.  Reduced Economic Growth: Due to the trade conflict, the level of Canadian output falls almost 3% over two years, effectively “wiping out growth in the economy for those two years.” 
5.  Increased Inflation: A trade conflict pushes up prices, even with weakening demand. Retaliatory tariffs on U.S. exports to Canada increase the consumer price index (CPI, also known as “inflation”), as approximately 13% of Canada’s CPI basket (the basket of goods used to measure price changes) consists of goods imported from the United States. 
A lower Canadian dollar also increases the cost of all imported goods and services. Integrated supply chains mean tariffs add costs at multiple stages of production. Inflation is expected to rise temporarily above the Bank’s 2% target.

What Monetary Policy Can Do?

The Bank of Canada is anticipating being in this predicament of how monetary policy might respond.

“…we need to carefully assess the downward pressure of inflation from weakness in the economy and weigh that against upward pressure of inflation from higher import prices and supply disruptions.”

The Bank of Canada is in a balancing act of lowering rates which could stoke inflationary pressures.  Or the Bank of Canada keep rates higher which would put additional down pressure on the economy. 

Tiff Macklem goes on further, “Unlike the pandemic, if tariffs persist there will be no economic bounce back.” 

Conclusion:

This is an absolute juggling act for the Bank of Canada.  

The Bank is warning us of 1) economic headwinds that would justify lower interest rates, and 2) the possibility of rising prices which would justify higher interest rates.  

If you see or hear anyone with any sort of conviction that they know where rates will be in 12+ months.  Be reminded, they are guessing. 

I’m developing a new “bi-lateral Mortgage strategy” that hedges against higher rates for piece of mind, and allows for some exposure to rate cuts (if they come). 

I hope this is helpful!

Talk soon,

Chad Moore