The Bank of Canada (BoC) made a jumbo-sized cut in October, lowering the policy interest rate from 4.25% to 3.75%. Such a low has not been seen since December 2022.
Now, another potentially large cut is expected on December 11. It will be the BoC’s fifth and final interest rate update this year.
Experts had been predicting a 0.25% cut, but some are now leaning more toward a 0.50% cut after Canada’s unemployment rate rose to 6.8% — a nearly eight-year high if you exclude the peak pandemic years of 2020 and 2021. Statistics Canada dropped the report on Friday morning.
max dallocco/Shutterstock
Penelope Graham, mortgage expert at Ratehub.ca, told us in detail what to expect.
“The current economic landscape is full of mixed signals and could provide a rationale for either a quarter-point or half-point cut in the Bank of Canada’s next announcement. A key point of focus for rate policymakers will be the differing growth pace between the Canadian and US economies and how unknowns, such as tariff threats, will bode for inflation and recession risks both north and south of the border,” she shared.
“The BoC could lean toward a larger cut following the most recent GDP report, which not only showed quarterly growth underperforming the Bank’s own forecast, but that the per-capita measure contracted for the sixth consecutive time. It’s clear Canadian citizens and businesses are increasingly feeling the effects of deepening ‘me-cession’ and the steep cost of living.”
Graham believes the BoC will also consider whether October’s “hotter-than-expected” inflation reading calls for a more conservative approach to rates.
“While still within the Bank’s target range of 2%, there are concerns that progress among the core inflation measures are starting to lag,” she noted.
“There are also growing doubts that the US Fed will slow its own cutting pace in 2025 and that the two central banks will diverge wider on their rate cutting cadence, which would put further downward pressure on the Loonie and drive Canadian inflation higher.”
Unemployment and interest rates
Graham called Statistics Canada’s latest jobs report “a mixed bag, ” adding to the growing number of contradictory signals the BoC must decode.
“As maintaining labour market stability is a priority for the BoC, November’s increased unemployment rate could increase the chance of a half-point cut rather than a quarter. However, the numbers appear weaker than reality; a key point is that the labour force itself – which represents the number of working-age people who are participating in the market and are looking for work – also increased. This offset the 51,000 jobs that were created during the month and contributed to the higher unemployment rate.”
She believes that the BoC will keep the jobs report on its radar, but other factors will be more likely to determine whether we get a 0.25% or a 0.5% cut. These include weaker-than-expected quarterly GDP, deepening trade risks, and 2% inflation.
However, if job numbers reflect the overall strength of the economy and if they continue to trend lower in the near future, along with other recession signals, the central bank will have to make more significant and more frequent rate cuts.
“When conditions are too weak, the BoC cuts its benchmark interest rate to make it easier for consumers and businesses to access credit and to promote spending. When the economy runs too hot, however – as it did following the lifting of pandemic lockdowns in 2022 – the bank needs to hike rates, to slow spending and keep a lid on inflation growth,” Graham added.
Senior CIBC Economist Andrew Grantham told us that Friday’s job data was the final piece of the puzzle before next week’s BoC decision.
“Even though the piece didn’t fit perfectly, we still see the picture of a struggling economy that needs the help of another 50-basis-point reduction in rates,” he said in an email.
Earlier this week, former Bank of Canada governor Stephen Poloz said Canada is already in a recession.
“I would say we’re in a recession; I wouldn’t even call it a technical one,” he stated in a webinar. “A technical one is a superficial definition that you have two-quarters of negative growth in a row, and we haven’t had that, but the reason is that we’ve been swamped with new immigrants who buy the basics in life, and that boosts our consumption enough.”
Housing and mortgages
Rising inflation and the possibility of higher tariffs have made for a pretty volatile bond market. Add to that a slower easing pace from the US Federal Reserve.
“As a result, Canada’s five-year government bond has hovered around the 3% range following the US election. That’s kept a firm floor under fixed mortgage rates, which could tick higher in the coming weeks if yields stay elevated,” Graham shared.
“From a home buyer’s perspective, it’ll get more affordable to enter the market as lenders’ prime rates – and by extension, variable mortgage rates – will lower again following the BoC’s announcement. Combined with new amortization and insured down payment reforms coming into force on December 15, this could lead to a hot January selling season once the holidays are in the rearview. Anyone shopping for a new mortgage or coming up for renewal on their existing term should connect with a mortgage professional to determine their strategy as the market heats up.”
Experts anticipate many more rate cuts from the BoC in the coming year. This will lead to savings and investing product rates to whittle down further, says Graham.
If you’re an investor, your returns will likely be smaller in the coming months.
Mortgage changes: An example
The following calculations are based on Ratehub.ca’s mortgage payment calculator.
Hypothetical situation: A homeowner puts a 10% down payment on a $696,166 home (the average price of a home as of October) with a five-year variable rate of 4.85% amortized over 25 years (total mortgage amount of $645,972) and has a monthly mortgage payment of $3,702.
If the BoC announces a 0.25% cut, the homeowner’s variable mortgage rate will decrease to 4.60%, and their monthly payment will decrease to $3,611. They’ll pay $91 less monthly, or $1,092 less yearly, on their mortgage payments.
If the BoC announces a 0.5% cut, the homeowner’s variable mortgage rate will decrease to 4.35%, and their monthly payment will decrease to $3,522. Thus, the homeowner will pay $180 less per month or $2,160 less per year on their mortgage payments.
Want to stay on top of BoC announcements and commentary? Tune in on these dates.