It has been a while since my last update so let’s start with a look at what’s been happening with interest rates over the last year.
A year ago, the 5-year government of Canada bond had a yield of 3.52% versus 2.65% now (as of yesterday afternoon).
Source: Bloomberg
Over that period, the Bank of Canada cut its target overnight rate seven times from 5.00% to 2.75%.
Source: Bloomberg
How did rates come down so much? The Bank of Canada held rates high enough to make significant progress on getting inflation under control before starting to ease, and the economy, broadly, has kept chugging along. Last week, the Bank of Canada summed up the current situation as follows: “The Canadian economy entered 2025 in a solid position, with inflation close to the 2% target and robust GDP growth.”
So that’s it, smooth sailing ahead, right? Nope. The next lines in their statement: “However, heightened trade tensions and tariffs imposed by the United States will likely slow the pace of economic activity and increase inflationary pressures in Canada. The economic outlook continues to be subject to more-than-usual uncertainty because of the rapidly evolving policy landscape.”
Central banks, who arguably had a tough enough job already, now also have to navigate a trade war… and not just a run of the mill trade war, one where tariffs can be announced, halved (or doubled), postponed (or moved up) in a matter of days (if not hours).
Outside of that, on Tuesday, Canadian CPI came in higher than expected at 2.6% (vs. expectations of 2.2%). This could reduce the Bank of Canada’s flexibility and might put them on hold for further inflation data.
In the US, the Federal reserve held their target rate steady on Wednesday. They, similarly, noted the potential for increased inflation and economic slowdown stemming from tariffs. They could also be on hold for some time.
Next week, watch for US initial jobless claims and US GDP on the 27th followed by Canadian GDP on the 28th.
Managing interest rate risk is another job that was tough enough already and now is subject to even greater uncertainty. The only thing that seems fairly safe to predict is that heightened volatility is likely here for a while.
At First National, we provide this information to help you select appropriate term as well as to be in a position to fix rates with as much market knowledge as possible. Reach out to your advisor to learn more about our industry leading rate lock program and to help you navigate the heightened volatility.