Speculation About September 2025 Interest Rates on Both Sides of the Border

It's that time of the month again for economists... But this time around, we may be in for some good news. After months of no to little change, it looks like the U.S. Federal Reserve is finally ready to cut interest rates.

This would mark the fourth time it has done so in 2025. Members had previously reduced key lending rates by 0.25% in August, following earlier cuts in March and June. With inflation steadily cooling and unemployment ticking up slightly, policymakers are signaling that they’re shifting focus toward supporting growth instead of only fighting price pressures.

Market watchers are already pricing in another 0.25% reduction at the upcoming meeting, which would place the federal funds rate at its lowest level since early 2023.

Some foresee different degrees of change; in a recent poll, 60% of experts (64 of 107) said they expect further decreases with the prevailing prediction being 50 basis points by the end of 2025. 37% of respondents anticipate as much as 75 bps cuts by year-end.

A nuanced mix of domestic indicators such as weak growth, rising unemployment, and manageable inflation will likely encourage the Bank of Canada to opt for a rate cut as well. 

Here’s more on the what when and why of these monthly meetings:

More On the U.S. Meeting

All of this speculation will be put to rest on Wednesday, when Fed Chair Jerome Powell and the Federal Open Market Committee (FOMC) release their decision and updated economic projections. Markets will be paying close attention not only to the actual rate cut, but also to Powell’s tone in the press conference afterward.

If the Fed signals that more cuts are on the table through the end of the year, equities could see a short-term rally, with tech and real estate stocks benefiting the most. On the other hand, if Powell stresses caution and frames this as the last adjustment for some time, investors may temper their expectations.

Why U.S. Decisions Matter for Canada

While the Bank of Canada operates independently of the Fed, the two institutions are closely intertwined. If U.S. borrowing rates fall significantly below Canadian levels, it can trigger capital flight – where investors shift money south to chase better returns. To prevent this imbalance or limit currency volatility, the Bank of Canada often makes rate moves that echo the Fed’s.

That doesn’t necessarily mean one-to-one matching. Canadian economists warn that the Bank of Canada also must weigh domestic indicators like Canadian inflation trends, unemployment, and housing dynamics before acting. But history shows that when the Fed tilts toward looser monetary policy, Canada usually follows with at least some easing of its own.

Canada’s September Interest Rate Decision

The upcoming Bank of Canada September 2025 update is highly anticipated. Most analysts expect a rate cut in response to a recent economic slowdown and persistently high unemployment both here and in the U.S. Governor Tiff Macklem and Senior Deputy Governor Carolyn Rogers will hold a press conference at 10:30 A.M. ET to announce their decision. What they say could significantly impact mortgage costs, investment decisions, and the future trajectory of property values for Canadian borrowers and real estate owners.

What Could a Rate Cut Mean for You?

Like it or not, we Canadians are very much susceptible to happenings in the U.S. – whether that's with regard to economics or politics. This particular topic of rate cuts brings both into play. And it's got both direct and indirect implications for those with mortgages on short-term rental properties.

Direct Impacts on Mortgage Holders

• Potential for Lower Borrowing Costs in Canada: If the Bank of Canada follows suit with rate cuts, mortgage costs on variable-rate loans could ease. For short-term rental investors, this translates to reduced monthly carrying costs, helping offset slower booking seasons or higher vacancy rates.
• Renewal Advantage: Those with upcoming mortgage renewals in late 2025 could benefit from more favorable terms if Canadian lenders adjust their rates downward in line with global trends.
• Cash Flow Flexibility: Lower mortgage payments free up capital that can be reinvested into property upgrades, improved guest experiences, or simply used as a buffer against income volatility.

Indirect Impacts to Keep in Mind

• Currency Shifts: A weaker Canadian dollar is a common side effect when the U.S. lowers rates, especially if Canada does not cut as aggressively. For short-term rental owners, this could actually attract more U.S. tourists, since Canadian stays suddenly look cheaper to them.
• Tourism Boost: More affordable U.S. borrowing can strengthen American consumer demand—potentially increasing cross-border travel to markets like Toronto, Vancouver, or Canadian resort towns. In turn, short-term rental operators may benefit from increased booking volumes.
• Asset Appreciation: Lower rates sometimes reignite housing demand even in higher-priced urban areas. For investors, this could mean rising property values, but it also risks tighter affordability for expansion plans if competition surges again.

A Friendly Reminder

When Donald Trump wants things, he typically gets them. The American President made it clear that lower interest rates are one of those things over the course of the summer as he publicly pressured U.S. Federal Reserve Chair Jerome Powell for cuts. Although not officially able to force such a move, threats of "firing" officials like Powell, along with plenty of public pressure, have surely influenced the current outlook to some extent.

But the actual data make a fair case for the Fed’s shift in policy. Inflation has trended down closer to the central bank’s 2% target, a sharp contrast to the persistent highs of 2022 and 2023. Meanwhile, wages are still rising, but at a slower pace, suggesting inflationary pressures from the labor market are easing. The flip side, however, is that job growth is cooling, with unemployment edging slightly higher than earlier this year.

These indicators give Powell and his colleagues room to argue that cutting rates isn’t simply a political concession, but a rational response to a slowing economy in need of support. Economists note that the Fed’s credibility hinges on balancing these two forces: distancing itself from political meddling while still acknowledging the importance of sustaining growth amid weakening demand.

Looking Ahead

We've still got many months left to go in 2025 – and within that time frame, several more opportunities for the Bank of Canada to meet and once again adjust its interest rate standards. Whether borrowing costs go up or down will almost always reflect economic conditions South of the border.

Should their inflation continue trending lower while unemployment edges higher, the case for additional cuts will strengthen. On the other hand, if consumer spending rebounds too sharply or supply-side pressures spark another wave of price increases, the Fed could pause or even reverse course to maintain long-term stability.

Homebuyers and borrowers may find windows of opportunity to secure cheaper financing, while savers and fixed-income investors will have to brace for reduced returns. Canada, meanwhile, will likely remain sensitive to every economic data release and every word spoken by Chair Powell in press conferences.

Strategic Considerations for Investors

You aren't at the mercy of prediction accuracy when it comes to interest rate shifts. Every investor can insulate themselves – and their bottom line – by remaining diligent in several ways.

Stay Alert on Bank of Canada Moves: Don’t assume U.S. cuts will automatically translate into Canadian policy changes. Keep an eye on domestic inflation and Canadian economic indicators like wage growth, unemployment, and housing activity.

Run Cash Flow Scenarios: Factor in both the possibilities of more relief through lower rates or a pause by the Bank of Canada that leaves you managing tighter margins. Rental income projections should be stress-tested for each scenario.

Balance Growth and Cushion: Use the potential lower carrying costs strategically—either by saving for future downturns or reinvesting to boost your property’s competitiveness as more hosts enter the market.

As the U.S. Federal Reserve prepares for yet another rate cut, Canadian short-term rental mortgage holders find themselves watching closely. While Canadian monetary policy won’t always mirror Washington’s decisions, the spillover effects – on borrowing costs, exchange rates, and tourism flows – are undeniable. Stay tuned for further updates.