There is interest growing in what move the Bank of Canada will make on its overnight interest rate on Sept. 17
Economists at Canada’s major banks have weighed in on the issue, with most of them, including Scotiabank, Bank of Montreal and CIBC predicting a .25% cut, while economists at RBC Economics have mixed views, some saying a cut and others saying the bank will hold the rate at 2.75%.
Those predicting a cut point to a weakened labour market, which lost 66,000 jobs in August, taking the unemployment rate to 7.1% plus core inflation that is still elevated. An unknown factor is a Canadian Price Index report that will be released the day before the bank’s announcement.
“A combination of weaker jobs data both north and south of the border has provided the bank a compelling reason to deliver a 25-point cut next week,” says Penelope Graham of Ratehub.ca. “Evidence is mounting that tariffs are whittling economic strength and that some stimulus will be needed in the short term.”
“The growing likelihood of a similar cut from the US Federal Reserve also provides the bank breathing room to lower rates without pressuring the Loonie.”
“The bank also has the next set of inflation data to mull over, due the day before its announcement. Should there be further progress in the headline number, and any softening among the core metrics, that will further seal the deal for a cut. However, given core inflation metrics remain elevated, the bank won’t be keen to pass along too much stimulus too soon.”
South of the border, the US Federal Reserve is facing growing pressure to cut rates, which has caused bond yields to drop there, as well as in Canada, says Graham.
“The Government of Canada five-year yield is now in the 2.7% range for the first time since May. This has put downward pressure on fixed mortgage rates, with the lowest five-year term in Canada back below the 4% threshold,” she says, adding, “borrowers may be wondering if they should wait for rates to lower further before choosing a mortgage product. However, borrowers shouldn’t delay taking out a rate hold or pre-approval, to preserve their rate options. While variable rates may trend lower, lenders could reduce their spreads to the prime rate in the coming weeks, which would reduce savings. As well, a rate hold will guarantee access to the lowest fixed mortgage rate for an extended period.”
Graham points out the spread between the lowest fixed rate and variable rates is four basis points, with both rate types potentially seeing decreases in the coming weeks.
“For those deciding between the two, it comes down to risk tolerance,” she says. “Variable rates may offer greater savings this year, but there are still economic headwinds that could push inflation higher, which would prompt the bank to reverse course.”
Prospective home buyers will find a favourable market with the combination of lower mortgage rates and housing market conditions across Canada favouring buyers.
“Home prices continue to stagnate, and the market is well supplied with inventory,” says Graham. “Further rate cuts could spark an uptick in sales activity, and competition, in the coming months.”
Graham gives an example of how a .25% cut in the bank rate will affect a mortgage on the averaged price home in Alberta in July ($502,066, as reported by the Canadian Real Estate Association).
“According to Ratehub.ca's mortgage payment calculator, a homeowner who put a 10% downpayment on a $502,066 home with a five-year variable rate of 3.95% amortized over 25 years and a total mortgage amount of $465,867 has a monthly mortgage payment of $2,438,” she says. “If the Bank of Canada announces a 25-basis point rate decrease, their variable mortgage rate will decrease to 3.7% and their monthly payment will decrease to $2,375, meaning the homeowner will pay $63 less per month or $756 less per year on their mortgage payments.”