Most people signing their first mortgage today weren’t even a twinkle in their parents’ eyes when Canada last tangoed with stagflation back in the early ’80s. However, if Trump’s trade mayhem continues on its present course, first-time homebuyers could get a front-row seat to this economic rarity — before the year’s out.

For those who didn’t major in economic jargon, stagflation is when the economy hits the brakes while prices hit the gas. It’s like economic quicksand, where the harder central bankers fight inflation, the deeper unemployment drags us down.

Here’s what this economic dumpster fire could mean for anyone shackled to a mortgage payment.

How stagflation could unfold

Nearly nine per cent of Canadian jobs are in industries that depend on U.S. demand for our exports, says Statistics Canada. Soon after Trump’s tariff announcement next Wednesday, we’ll start getting more precise unemployment estimates from economists. If his tariff threats aren’t just bluster, it may be a grim reality check on job losses.

Inflation-wise, it’s often said that tariffs are a one-time price adjustment and not persistently high price increases. But the dangers are the ripple effects and central bankers reacting to them too late. If we all start believing inflation has legs, that ‘one-time’ impact could become a two- to four-year inflation-fighting marathon.

And it doesn’t take years of inflation to send mortgage rates skyward. The last inflation bout lasted just 33 months, but that was enough to catapult average mortgage rates over 400 basis points.

To put that into context, the 2021 to 2023 spike boosted payments on a standard $300,000 mortgage by over 50 per cent ($600-plus per month). It increased interest costs by roughly $57,000 for new five-year fixed mortgage terms.

The bond market, which leads mortgage rates, anticipates the future with yields moving several weeks or months before Bank of Canada rate changes. Lenders then price in heightened credit risk and mortgage funding illiquidity. That often leads to steep reductions in mortgage discounts — especially on variable mortgages.

What policymakers can do

In January, Bank of Canada deputy governor Toni Gravelle called a stagflationary outcome “complicated” — a contender for understatement of the year!

The central bank’s weapons simply aren’t optimized for fighting this kind of economic warfare. In fact, the Bank of Canada seems to avoid even uttering the word “stagflation,” for fear it will summon Beetlejuice-like mayhem. (A quick search for “stagflation” on its website yields next to nothing of value.)

Currently, one-year inflation expectations are soaring, as consumers brace for tariffs to drive prices higher. If those same surveys start showing soaring inflation expectations more than just one year out, and core inflation readings keep coming in hot, the Bank of Canada will have to hint at rate hikes to keep inflation expectations in check. Failing that, a swift policy reversal with increased rates might be on order.

For now, the central bank might just kick back and play the wallflower, watching how the drama unfolds. After the 2021-’22 fiasco, however, where it waited too long to hike rates, it can’t afford to let inflation expectations de-anchor. If it does, those expectations could turn into prophecy faster than you can say “self-inflicted wound.” That’s largely why markets are pricing in only a one in three shot of a rate cut at the Bank of Canada’s next April 16 meeting.

Meanwhile, if next week’s tariffs are as bad as some fear (and they may be, given that Trump just imposed so-called “permanent” 25 per cent automobile tariffs), our government will come to the rescue. It’ll inject the economy with billions in fiscal assistance.

Ottawa could also invest massively in growth projects meant to wean us off the U.S. teat. This could deepen the deficit, sustain inflation, and bolster bond yields and mortgage rates. On that note, if the new government has any sense, it’ll steer clear of broad, untargeted cash handouts, which exacerbated inflation (and rate increases) post-COVID.

None of this is to say bond yields and mortgage rates can’t dip further before they rise. After all, the growth hit to Canada’s economy will worry a lot of investors, causing them to run for cover in ‘safe’ government bonds. (Increased demand for bonds drives down yields and, consequently, fixed mortgage rates.)

Mortgage choices in a stagflationary world

Keep in mind, all these scenarios could shift if America’s protectionist peacock reconsiders his tariff stance. For now, however, a cautious strategy for choosing mortgage terms seems prudent.

That could mean locking in a sub-4.00 per cent five-year fixed or straddling the fence with a hybrid — half fixed, half variable — around 4.15 per cent.

Three-year terms, as popular as they are right now, may not be long enough to ride out a stagflationary storm.

And if you’re semi-risk averse but still determined to go variable, be prepared to change course by locking into a fixed if: (a) inflation becomes a more significant threat, and (b) Canada’s five-year government bond yield rockets above 3.40 per cent.

Ultimately, we need more intel on how severe these tariffs might be and how long they’ll last, so hopefully, next week, we get a big batch of clarity.

Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.

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