On September 16, the U.S. Federal Reserve announced a 25-basis-point interest rate increase, bringing the federal funds target range to 3.75%–4.00%. It marked the first U.S. rate hike since 2023, with the Fed pointing directly to one major concern: inflation remains elevated.
So what does this mean for Canada?
The Bank of Canada’s next interest rate decision is scheduled for October 28. Its policy rate currently stands at 2.25%, and the Bank will release a new Monetary Policy Report alongside that decision.
The problem is that the Bank of Canada now finds itself in an increasingly difficult position.
Canada Is Facing Conflicting Economic Pressures
On one hand, the Canadian economy is not particularly strong. Higher interest rates would put additional pressure on household spending, business investment and the housing market.
On the other hand, inflation has not completely disappeared.
Canadian CPI inflation has recently been hovering around 3%, largely because of higher gasoline prices. Excluding gasoline, inflation was 2.2% in July, while the Bank’s measures of core inflation remained close to 2%. The Bank has nevertheless warned that persistent energy costs could eventually spread into other prices.
And now there is another major complication: the renewed Canada-U.S. trade conflict.
The Trade War Makes the Bank of Canada’s Job Harder
After Canada-U.S. trade negotiations broke down, the United States imposed a 50% tariff on $27.6 billion worth of Canadian goods, effective August 22.
Canada responded with matching counter-tariffs covering $27.6 billion of U.S. imports. Effective September 8, tariffs of 15%, 25% and 50% were applied across affected categories including steel, dairy products, appliances, agricultural equipment, pulp and paper, and electronics.
The economic problem works in both directions.
U.S. tariffs can hurt Canadian exports, corporate profits, investment and employment. Canadian counter-tariffs, meanwhile, increase costs for some imported goods and business inputs.
In other words, economic growth could weaken without inflation necessarily falling with it.
That is one of the most difficult combinations for a central bank to manage.
The Bank of Canada acknowledged this tension in its September deliberations. Policymakers noted that trade uncertainty could affect the durability of Canada’s economic recovery, while tariffs also create additional inflation risks.
U.S. Rate Hikes Add Another Layer of Pressure
The latest Federal Reserve decision further widens the interest-rate gap between Canada and the United States.
A larger rate differential can put additional pressure on the Canadian dollar. A weaker Canadian dollar, in turn, can make imported goods more expensive and add another source of inflationary pressure.
This makes the Bank of Canada’s next move even more complicated.
The issue is no longer simply whether Canada needs higher or lower interest rates. The Bank has to balance economic weakness, inflation, trade uncertainty and currency pressures at the same time.
What Does This Mean for Canadian Real Estate?
For the housing market, the risk is that higher borrowing costs remain in place while the trade conflict simultaneously weighs on economic growth and employment.
First, the housing market’s recovery could take longer than expected. Higher financing costs continue to constrain affordability, while weaker employment and income expectations could make households more cautious about major financial commitments such as purchasing a home.
Second, housing prices will depend increasingly on actual supply and demand rather than support from changing interest rates. In markets such as the GTA, where inventory remains elevated, prices may struggle to develop sustained upward momentum unless sales activity strengthens.
Third, pricing strategy becomes increasingly important for sellers. In a market without strong upward momentum, pricing a property based on previous market conditions or an owner’s expectations can lead to longer days on market and eventual price adjustments.
The Bigger Risk Is the Economy
Ultimately, the direction of the housing market will depend on more than the next Bank of Canada decision.
The key questions are whether employment can remain stable, whether existing housing inventory can be absorbed, and whether the Canadian economy can withstand a prolonged period of trade disruption.
Canada is facing a particularly difficult combination: the economy could benefit from lower borrowing costs, but inflation risks limit how much flexibility the Bank of Canada has.
And if the trade conflict escalates further, the impact on real estate could extend well beyond mortgage rates. Weaker business investment and employment could eventually affect household income and consumer confidence—two fundamentals that matter greatly to housing demand.
The Bank of Canada’s next rate decision comes on October 28, together with a new Monetary Policy Report.
This time, the most important question may not simply be whether the policy rate changes.
What matters more is how the Bank assesses the outlook for Canada’s economy, inflation and the growing risks from the Canada-U.S. trade conflict.
