With the return of Donald Trump and his well-known stance on protectionist trade policies, Canada is once again facing the real threat of U.S. tariffs. We may have escaped tariffs for now, but make no mistake, if there’s one thing that is predictable about this President, it’s his unpredictability. This development has significant implications for the Bank of Canada (BOC) and, ultimately, the Canadian housing market. If new tariffs do come into play, the BOC will have to abandon its primary focus on inflation and shift towards supporting economic growth, a move that would lead to rate cuts.

Economists widely agree that if Trump were to impose tariffs on Canada, the economic consequences would be severe. A 25% blanket tariff would be devastating to Ontario’s auto sector, and thus, its entire manufacturing supply chain that employs some 800,000 people. This is just one example of the potential damage. Economists have already noted that the risks to economic growth would far outweigh the potential short-term inflationary effects of retaliatory tariffs imposed by Canada. Historically, the BOC has maintained a mandate focused on keeping inflation at or near its 2% target. However, an economic downturn driven by tariffs would force policymakers to reconsider their approach.

Economists project that if full-scale tariffs are imposed and persist over the long term, Canada’s GDP could decline by as much as 5%. For a $2 trillion economy, that represents $100 billion in economic output and jobs that will evaporate. Inflation, meanwhile, could spike to the upper limit of the BOC’s target range at 3%, driven by higher import costs and a depreciating Canadian dollar. Despite this, the BOC is expected to prioritize growth over inflation. “In a lasting trade war scenario, downside risks to growth would trump what would be temporary and soon-reversed upside risks to inflation,” explained Avery Shenfeld, Chief Economist at CIBC, in a Financial Post article. This perspective suggests that the BoC would be more inclined to lower rates rather than hold them steady in the face of economic turbulence.

The possibility of tariffs being imposed has not disappeared. Even with the deadline for new duties being pushed back, experts believe it is only a temporary reprieve. Nick Rees, head of macro research at Monex Europe Ltd., warns that tariffs are still likely. He points to Trump’s need for additional revenue to fund corporate and personal tax cuts, as well as his broader economic strategy of bringing manufacturing back to the U.S. Tembo is doubtful that potential tariffs would seriously target Ontario’s auto sector and broader manufacturing base, given how intrinsically linked it is to the U.S. auto sector. A tariff on Canadian car parts would cause job losses in U.S. auto plants, as they would not be able to easily and quickly compensate for more expensive Canadian parts quickly. Job losses in key auto producing swing states like Michigan, Georgia, and Tennessee would be unacceptable to the Trump Administration.

There are other sectors that could be targeted, such as the dairy industry, or the lumber sector. Given these factors, it is almost inevitable that Canada will face protectionist measures from a second Trump administration. The question then becomes: How will the Bank of Canada respond? At the BOC’s January 29 meeting, Governor Macklem acknowledged the complex challenge tariffs pose. “This is a complex shock for monetary policy because growth will be weaker, inflation will be higher,” he stated. The balancing act between inflation and economic stability is not an easy one, but if history is any guide, growth concerns tend to win out. Make no mistake, the BOC will sacrifice the dollar and inflation to cushion the economy and job losses from tariffs – Tembo has no doubt about that.

It’s not just the immediate impact of tariffs and job losses that is the issue. The broader damage is the blow to business confidence, to long-term investment plans, and to Canada’s attractiveness to foreign companies and investors looking to sink capital into the country. We won’t see pipelines built, EV car plants set up, or foreign mining multinationals spend billions to get critical minerals out of the ground here if you have a White House south of the border that will turn tariffs on and off over the long term. It’s too risky and unstable. The chaos is enough to swing the economic momentum toward the U.S. and away from Canada, and that is probably what the President has in mind anyway. Also, it is widely known that Trump despises Trudeau. Personal relationships matter in politics. Trump will want to directly damage Trudeau and his government, even if it is surely in its twilight years, and he already has.

Most economists now expect the BoC to cut rates significantly. Prior to recent tariff threats, RBC had forecasted that the BoC would lower its benchmark interest rate to 2% by the end of the year. However, if a full-blown trade war ensues, the cuts could be even deeper. CIBC, for example, was already predicting rates to fall to 2.25% in the second quarter, even before factoring in new tariffs.

For homebuyers, real estate investors, and mortgage lenders, falling interest rates are a major tailwind. Here’s why:

Increased Housing Demand: With borrowing costs decreasing, more buyers are likely to enter the market. This demand puts upward pressure on home prices, benefiting homeowners and real estate investors.

Strong Investment Returns: Lower interest rates typically drive investment capital towards real estate as bond yields become less attractive. Investors seeking stable, appreciating assets will find real estate more appealing, further fueling demand and price growth.

Resilience in Key Markets: The housing market in major Canadian cities like Toronto has historically been resilient to economic downturns. Even amid tariff-induced economic stress, lower interest rates would counterbalance the impact, keeping real estate as a safe haven for capital.