People are asking - How Do Tariffs Affect Interest Rates?

Tariffs are taxes on imported goods, which can lead to higher costs for businesses and consumers. This creates two competing forces that impact interest rates:

1. Tariffs Can Increase Inflation

   • When imported goods become more expensive, companies pass those costs onto consumers.

   • This can lead to overall price increases, driving inflation up.

   • In response, central banks may raise interest rates to curb inflation.

2. Tariffs Can Slow Economic Growth

   • Higher costs for businesses can lead to reduced hiring, investment, and consumer spending.

   • This weakens economic growth, which might prompt central banks to lower interest rates to stimulate the economy.

What’s Happening Now?

The Bank of Canada recently cut its key policy rate by 25 basis points to 3% on January 29, 2025.
This marks the sixth consecutive rate cut, indicating that policymakers are more concerned about slowing economic growth than rising inflation.

According to a Reuters report:

• The Bank of Canada sees tariffs and trade tensions as a threat to long-term economic stability.

• A prolonged U.S.-Canada trade war could permanently impact GDP levels.

• The recent rate cuts are intended to support growth amid trade uncertainty.

This suggests that if tariffs continue to create economic challenges, further interest rate cuts are possible.

What Does This Mean for Real Estate?

1. Mortgage Rates Could Decrease

   • Lower interest rates often mean lower mortgage rates, making homeownership more affordable.

   • Buyers could borrow more for the same monthly payment.

2. Housing Market Activity May Increase

   • Lower mortgage rates can spur demand, leading to more buyers entering the market.

   • This could create more competition, stabilizing or even increasing home prices.

3. Builders May Benefit from Lower Borrowing Costs

   • Developers financing new projects could see cheaper loan costs, encouraging more construction.

   • This could help increase housing supply, which is needed in many markets.

Final Thoughts

While tariffs can put upward pressure on inflation, their overall impact on the economy may prompt central banks to continue lowering interest rates—at least in the short term. If you’re a buyer, this could mean an opportunity to lock in a lower mortgage rate. For sellers, lower rates could increase buyer demand and stabilize home prices.

With economic conditions shifting, it’s crucial to stay informed and make real estate decisions based on market trends. If you’re considering buying or selling, now may be the time to explore your options.

Would you like more insights on how current economic conditions affect your real estate goals? Let’s connect!