Could Potential New U.S. Tariffs Change Interest Rates?

One question many Canadians may be asking these days is:

Do potential new U.S. tariffs mean higher interest rates?

The short answer is: not necessarily.

Here's why.

When the Bank of Canada makes interest rate decisions, it looks at a wide range of economic data. Two of the most important indicators are inflation, measured by the Consumer Price Index (CPI), and economic growth, measured by Gross Domestic Product (GDP).

First, let's talk about CPI:

The Consumer Price Index, or CPI, measures how the prices of a basket of goods and services change over time. It is Canada's most widely used measure of inflation.

As of June 2026, Canada's annual inflation rate was 2.8%, down from 3.2% in May, indicating that inflation pressures have eased somewhat.

Next is GDP:

Gross Domestic Product, or GDP, measures the total value of goods and services produced in the economy and is one of the key indicators of economic activity and growth.

In its July 2026 Monetary Policy Report, the Bank of Canada noted that Canada's trade relationship with the United States remains one of the most important risks to both economic growth and inflation.

In simple terms, tariffs can affect both CPI and GDP, but often in different ways.

How can tariffs affect inflation?

Tariffs can increase the cost of imported goods. Businesses may pass some of these costs on to consumers, potentially putting upward pressure on inflation.

How can tariffs affect economic growth?

At the same time, tariffs may reduce trade, weaken business investment, increase uncertainty, and slow consumer spending, all of which can weigh on economic growth.

So what does that mean for interest rates?

This is where it gets interesting.

If inflation becomes the bigger concern, the Bank of Canada could consider raising rates or keeping rates higher for longer.

However, if slower economic growth becomes the greater concern, the Bank may consider cutting rates to support the economy.

That's why tariffs do not automatically mean higher rates or lower rates. It depends on which effect ends up having the larger impact on the Canadian economy.

RBC Economics has described the Bank of Canada's risks as two-sided: weaker-than-expected growth could support rate cuts, while broader and more persistent inflation could create pressure for higher rates.

The million-dollar question

Under current tariff tensions and fluctuating energy prices, which factor will become more important: inflation or economic growth?

Will rising costs push inflation higher?

Or will economic growth slow enough to encourage future rate cuts?

And let's not forget a third possibility.

Since October, we've also seen a scenario where the Bank of Canada has chosen to hold rates steady, waiting for more evidence before moving in either direction.

In periods of uncertainty, staying on the sidelines can sometimes be the preferred approach.

One final point

Not all mortgage rates are affected the same way.

Variable-rate mortgages are influenced primarily by the Bank of Canada's policy rate.

Fixed-rate mortgages, on the other hand, are driven mainly by Government of Canada bond yields, which can move independently from the Bank's policy decisions.

So even when the Bank of Canada holds rates steady, fixed mortgage rates can still move up or down depending on bond market expectations.

Remember, when it comes to rates, it's not just about tariffs. It's about how tariffs affect inflation, growth, and ultimately the decisions made by the Bank of Canada.

Disclaimer

This post is intended for general information purposes only. Its goal is to provide additional context on the factors that influence Bank of Canada rate decisions. It is not financial, investment, or mortgage advice, nor is it a prediction of future interest rate movements.

If you'd like to discuss your mortgage options and how current economic conditions may affect your situation, feel free to reach out.

#interestrates #ustariffs #mortgaes #GDP #CPI