Banking giant warns further rate cuts may hinge on US-Canada trade pact outcome
Canada’s mortgage and housing markets are set for a slow but steady recovery, but the path forward is clouded by trade uncertainty and the risk of further US tariffs, according to a new CIBC Capital Markets forecast.
The bank’s latest analysis projects that while a “soft landing” is likely, the road ahead is fraught with tail risks that could force policymakers to act again.
“Since the trade conflict started, Canada’s Plan A was to put in all efforts to reverse it,” Avery Shenfeld, chief economist at CIBC, said.
“While some progress towards a lighter US tariff on aluminum, and perhaps a bit of an easing in auto tariffs, still seems possible, even sectors now escaping tariffs will be cautious about adding capacity in Canada if it’s aimed at serving the US market.”
Shenfeld added that exports are expected to climb from recent lows, but “to get back to full employment, business and governments will [be] looking for a ‘Plan B.’ That will include public and private infrastructure spending to increase resource export prospects, trade diversification efforts, support for home building, and the lift from a made-in-Canada, travel-in-Canada tilt from consumers.”
CIBC’s forecast assumes modest relief from existing sectoral tariffs—aluminum most likely to benefit, autos less certain—but also depends on Canada retaining free trade access under the Canada-US-Mexico Agreement (CUSMA).
“Should that pact fail to be extended, and White House wins court approval for the ‘fentanyl’ tariffs, or applies a broad tariff under other legal grounds, Canada will be in need of additional rate cuts in 2026,” Shenfeld said.
The report notes that the Bank of Canada is expected to deliver another quarter-point rate cut, providing “some further relief to variable and short-term mortgage borrowers, even if longer term yields stay elevated from the spillover of US fiscal deficits and an increase in Canadian government bond supply.”
However, fiscal policy is likely to remain tight in the near term, with federal budgets focusing on capital projects that may take years to impact the economy.
CIBC highlights the outsized role of AI-driven capital spending in the US, the impact of immigration slowdowns on labour force growth, and the risk that “inflation pop from tariffs prove to be transitory.”
The bank’s base case for Canada is GDP growth of 1.2% in 2025 and 1.4% in 2026, with unemployment hovering near 7%.
Housing starts are projected to rise from 262,000 in 2025 to 276,000 in 2026, but business investment remains muted by trade uncertainty.
“Even so, our forecasts project that the recovery will leave excess slack in the labour market through 2026,” Shenfeld said.
“If that base case sounds somewhat comforting, judging by the calm risk metrics we cited up front, it’s not as much of a sure thing as markets seem to be counting on.”
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