On the Radar: The Bank of Canada Held, U.S. Inflation Hit a Three-Year High, and Trump Threatened the Trade Deal. What Does It All Mean for Mortgage Rates?

  • First National Financial LP

Quick takes:

  • The Bank of Canada held at 2.25% for the fifth consecutive decision on Wednesday, with Governor Macklem warning that “consecutive increases” are possible if energy-driven inflation broadens, while markets price a 95% chance of another hold at the July 15 meeting.
  • U.S. consumer prices rose 4.2% year-over-year in May, the fastest pace since April 2023, with the energy index accounting for more than 60% of the monthly increase and a 10.5% probability of a Fed rate hike building for July 29.
  • Core inflation told a calmer story on both sides of the border, with Canadian core measures falling to around 2% and U.S. core CPI rising just 0.2% month-over-month, below the 0.3% economists had expected.
  • President Trump said he is “not looking to renew” the USMCA on the same day, with the July 1 extension deadline three weeks away and officials expecting negotiations to continue into a period of annual reviews rather than a 16-year renewal.

Wednesday packed three of the most important signals for Canadian mortgage rates into a single day. The Bank of Canada held its policy rate at 2.25 percent for the fifth consecutive decision. Across the border, U.S. consumer prices rose 4.2 percent in May, the highest year-over-year reading in three years.

On the same day, President Trump told reporters he is not looking to renew the USMCA, the three-country trade agreement, with the July 1 extension deadline just three weeks away. All three stories are connected by the same underlying forces: oil-driven inflation from the war in the Middle East, a weak Canadian economy weighed down by U.S. trade restrictions, and a central bank that cannot move in either direction.

What the Bank of Canada said and did not say

Governor Tiff Macklem held the rate on Wednesday but gave the clearest signal yet that the next move could go in either direction. “For now, holding the policy rate unchanged balances those risks,” he said at the press conference following the announcement.

The two-sided language was pointed. Macklem warned that if the Middle East conflict continues and higher energy prices lead to “ongoing generalized inflation,” there may be a need for “consecutive increases in the policy rate.” However, he also said the Bank may need to cut if the United States imposes significant new trade restrictions on Canada.

So far, the Bank sees limited evidence that high energy prices are bleeding into broader inflation. Canadian headline CPI reached 2.8 percent in April, up from 2.4 percent the month before, driven almost entirely by gasoline. But the core measures the Bank watches most closely fell to around 2 percent, and Macklem noted that the share of CPI components running above 3 percent remains close to a historical average.

Macklem also pushed back on the idea that Canada is in a recession, despite two consecutive quarters of GDP contraction. “Recession is not the word I would use,” he said. “I would describe the economy as weak.”

U.S. inflation just made the Fed’s job harder

Across the border, the picture was worse. Consumer prices rose 4.2 percent year-over-year in May, up from 3.8 percent in April, marking the fastest pace since April 2023.

Energy was the main driver. The energy index accounted for more than 60 percent of the monthly increase in consumer prices, with gasoline hitting a four-year high of $4.56 per gallon in late May before cooling to about $4.15 in recent days. On its own, gasoline jumped 7 percent on the month and more than 40 percent from a year earlier.

However, the core reading offered some relief. Core CPI, which strips out food and energy, rose just 0.2 percent month-over-month, cooler than both the prior month’s 0.4 percent and the 0.3 percent economists had expected. That suggests the energy shock has not yet spread deeply into other U.S. prices.

The report matters for Canadian mortgage rates because it lands one week before the Federal Reserve’s June 17 meeting, the first under new Chairman Kevin Warsh. Markets are pricing a 98.3 percent chance the Fed holds at 3.50 to 3.75 percent next week. But hike expectations are building further out, with a 10.5 percent probability of a rate increase at the July 29 meeting.

Trump threatened to walk away from the trade deal

On the same Wednesday the Bank held and U.S. inflation data landed, President Trump told reporters from the Oval Office that he is not looking to renew the USMCA. The three countries are meant to decide by July 1 whether to extend the agreement for another 16 years. If they do not agree, the treaty stays in force but moves to a period of annual reviews for 10 years, during which any country can withdraw with six months’ notice.

Officials from all three countries expect negotiations to continue beyond the deadline, making the annual-review scenario the most likely outcome. Canada’s Trade Minister Dominic LeBlanc has sought to downplay the significance of July 1, telling reporters it is important “not to set up a cliff that doesn’t exist.” But the President’s language added a note of unpredictability to a process that was already tense.

For the Bank of Canada, the trade threat cuts directly to the rate decision. Macklem said on Wednesday that if the United States imposes significant new trade restrictions, the Bank “may need to cut the policy rate further to support economic growth.” That language links the USMCA review directly to the interest rate outlook.

What this means for Canadian mortgage rates

Variable rates are tied to the Bank of Canada’s overnight rate through prime, and the fifth consecutive hold means they remain unchanged. Markets are pricing a 95 percent chance the Bank holds again at the July 15 meeting, with a 5 percent probability of a hike and zero chance of a cut. Until oil prices, trade conditions, or both shift meaningfully, variable-rate holders face a stable but stuck outlook.

Fixed rates follow GoC bond yields, and the U.S. inflation report is bad news on that front. When U.S. CPI runs hot, it keeps Treasury yields elevated because traders price in a longer hold or even a hike from the Fed. Those elevated yields put a floor under Canadian bond yields, which prevents fixed rates from falling even as the domestic economy weakens.

What makes this moment especially difficult is that the Bank cannot solve either problem with its main tool. Higher rates would not lower oil prices or reopen the Strait of Hormuz, and lower rates would not ease U.S. trade restrictions. Both risks are supply-driven, which leaves the Bank waiting for clarity rather than acting.

What could change the picture

A ceasefire or de-escalation in the Middle East would be the single biggest catalyst for lower rates. If the Strait of Hormuz reopens and oil prices drop, headline inflation falls quickly in both countries. That would free the Bank of Canada to cut and ease pressure on U.S. Treasury yields, bringing both variable and fixed rates down.

The opposite risk is that the conflict drags on through the fall and energy costs stay elevated. In that scenario, the pass-through Macklem is watching for could start showing up in Canadian core inflation, forcing the Bank to deliver on its warning about consecutive hikes. A Fed rate increase, even at the July meeting, would push Treasury yields higher and pull Canadian fixed rates up along with them.

Trade uncertainty adds a wild card on top of the inflation picture. If the USMCA negotiations break down and the United States imposes new restrictions, the Bank would face pressure to cut rates in support of growth, which could bring variable rates lower. But if the annual-review scenario proceeds without major disruption, trade risk fades and the rate outlook stays where it is.

Bottom line

The Bank of Canada held, U.S. inflation hit a three-year high, and Trump threatened the trade deal, all on the same day. Each story pushes the rate outlook in a slightly different direction, but the net effect is the same: more uncertainty and no clear path to lower mortgage rates in the near term.

For mortgage holders, the practical message is that rates are likely staying near current levels through the summer. The war in the Middle East, U.S. inflation, and the USMCA review all need to resolve before the Bank has room to move, and none of those outcomes is in any central bank’s hands.

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