The Bank of Canada faces some big decisions in the months ahead – and fixed rates could be on the move too
Five-year Government of Canada bond yields slid on Friday as economic jitters spread through financial markets and signs emerged of a weakening US economy.
That yield, a key indicator of where Canadian fixed mortgage rates are headed, had slipped to 2.941% at time of writing, helping offset a runup seen in recent weeks and strengthening hopes that relief on the fixed-rate front could be on the way.
The dip arrived as short-term US Treasury yields also tumbled, following an escalation in Donald Trump’s global trade war and a labour market report that showed the US economy added fewer jobs than expected in July.
Odds of a September interest rate cut by the Federal Reserve jumped after that jobs data, potentially also signalling that more downward pressure on Canadian bond yields is ahead.
“This is where the prospect of Fed rate cuts really does help,” Bank of Montreal (BMO) chief economist Doug Porter (pictured top) told Canadian Mortgage Professional. “For weeks now, the longer-term yields were going the wrong way, partly on concerns about the broader fiscal landscape but also because the market was slowly but surely taking out rate cuts by a lot of central banks.
“Now, with a very real possibility that the Fed could start cutting interest rates, I think that’s put a better shine on bond markets almost everywhere, including here in Canada – and that could help fixed rates start moving in the right direction.”
Expect some fixed-rate mortgage relief – but not much
Canadian mortgage holders and homebuyers have seen little cause for celebration on the rate front in recent months. The Bank of Canada kept its benchmark rate unchanged once again on Wednesday, meaning variable rates are staying where they are, while that recent runup in fixed rates also squeezed budgets and complicated the picture for homeowners renewing their mortgage.
But while a trend toward lower fixed rates would be welcome, Porter cautioned against assuming they’re about to nosedive. “I wouldn’t look for a whole lot [of movement] there,” he said. “I don’t think there’s a lot of room for longer-term yields to really plunge. But even a quarter-point would help that a great deal.”
The Bank of Canada signalled on Wednesday that it could be open to rate cuts in its remaining decisions this year, although Porter said the central bank “set the bar pretty high”: the economy needs to weaken further without a further surge in inflation from the trade war.
The Bank of Canada held interest rates steady in its July decision, keeping rates unchanged yet again as it weighs up the impact of the US trade war on inflation and the national economy.https://t.co/OJa9l7NGra
— Canadian Mortgage Professional Magazine (@CMPmagazine) July 31, 2025
“That’s a lot to go right for rate cuts,” he said. “The market is still leaning to one more cut by the Bank. But the market needs convincing. We definitely need a friendly CPI [consumer price index] report before the Bank will consider cutting rates.”
Trade war escalation likely to weigh against economic growth
Trump’s decision to slap higher levies on certain Canadian imports than originally announced struck a blow to hopes of a trade deal and raised the chance of a further deterioration in relations between the two powers.
While plenty of cross-border trade will remain unaffected because it’s compliant with CUSMA [the Canada-US-Mexico Agreement], Trump said he was hiking tariffs on specific other Canadian products to 35%, up from the originally threatened 25%.
That trade uncertainty is likely to represent “a pretty serious drag” on the economy in the coming years, Porter said, because prospects of negotiating broader agreements with the US appear bleak after the latest escalation.
But Canada looks unlikely – for now, at least – to retaliate against Trump’s latest tariff wave, meaning the national economy may be spared an inflation upsurge.
“This is a bigger story for weaker growth rather than higher inflation,” Porter said. “And I think on balance, that means the Bank is ultimately going to have to cut interest rates a bit further. That might take time, because they’ll have to be convinced that inflation is not doing that much.
“But I just think the ongoing trade uncertainty is a killer for growth and it does ultimately require some offset from an easier monetary policy.”
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