The Bank of Canada (BoC) has already cut its overnight rate twice this year, and experts believe several more reductions are coming.
The overnight interest rate dropped from 5% to 4.75% in June and 4.50% in July, following promising CPI reports from Canada and the US.
A rate cut is firmly expected on Wednesday, September 4, with two more announcements scheduled before the end of 2024. Penelope Graham, mortgage expert at Ratehub.ca, shared her insights with Daily Hive.
“The latest inflation numbers, both out of Canada and the US, have cemented expectations for rate cuts to continue at each of the remaining Bank of Canada announcements in 2024 and well into 2025,” she stated in an email. “Three more quarter-point cuts totalling 0.75% will bring the Overnight Lending Rate to 3.75% by the end of the year, its lowest since December 2022.”
The Bank of Canada building in Ottawa (Gary A Corcoran Arts / Shutterstock.com)
On August 20, Statistics Canada published the July Consumer Price Index, showing that inflation had decelerated to 2.5%, down from 2.7% in June. This makes further BoC rate cuts all the more likely, and 2.5% is the closest we’ve been to our 2% target rate in years.
Plus, the US released July CPI on August 14, showing that inflation has slowed to 2.9%. Since both countries are so deeply tied together, such economic patterns in the US have historically replicated themselves in Canada, and that’s the expectation again.
“While the Bank of Canada is already well into its cutting cycle, that the US Federal Reserve is preparing to kick off its own on September 18 further supports our central bank’s downward trajectory without risking pressure on the Canadian dollar or trade economy,” Graham shared.
She said that as Canada’s CPI falls closer to the BoC’s 2% target, the concern is shifting from inflation’s progress to whether the economy will indeed achieve “a soft landing.”
The commentary accompanying the September 4 announcement will be worth listening to. It will focus on how weakness is unfolding in Canada’s labour market.
Expectations for homebuyers
Gorodenkoff/Shutterstock
“The Canadian five-year bond yield tumbled to below 3% following the global stock market event in early August, and it has remained there since, as investors are encouraged by the likelihood of central bank rate cuts in Canada and the US. That’s put downward pressure on fixed mortgage rates, with several lenders discounting their five-year term options. While yields remain volatile, rate cut sentiment will likely push them down further, pending any unexpected economic events,” shared Graham.
The expert believes that with mortgage rates changing so regularly, Canada’s real estate market could heat up this fall, making it crucial for mortgage borrowers to shop around for the best rate.
“Variable mortgage rates are looking more attractive as they’re poised to lower in the near future, but if we’ve learned anything from the BoC’s rate hiking cycle, nothing is certain. It’s important to understand the risks associated with variable rates and to connect with a mortgage professional to determine whether they’re a good fit for you.”
Thus far, BoC’s rate cuts have not deeply impacted Canada’s real estate market, but that could change as further cuts follow, improving housing affordability conditions for the nation’s borrowers.
However, impending cuts are not great news for everyone.
“Passive investors and savers have less to cheer about. An additional quarter-point rate cut will lower Canada’s prime rate to 6.45%, in turn pulling down the rate of return for products such as high-interest savings accounts and GICs,” Graham concluded.
Want to stay on top of BoC announcements and commentary? Tune in on these dates.