The Bank of Canada makes its next overnight rate announcement on Wednesday, with expectations it will make a third consecutive cut of .25%, per a survey conducted by Bloomberg of 26 economists between August 16 and 21. That would take the rate to 4.25%, with the economists predicting “faster and deeper cuts to borrowing costs over the next year,” says Bloomberg, adding the expectations are for a rate hovering around 3% by July 2025, reaching an average of 2.75% in 2026. Penelope Graham of Ratehub.ca is in concert with the economists surveyed by Bloomberg. “The latest inflation numbers, both out of Canada and the US, have cemented expectations for rate cuts to continue at each of the (three) remaining Bank of Canada announcements in 2024, and well into 2025,” says Graham. “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.” Graham adds the announcement last week by Jerome Powell, chair of the US Federal Reserve, that it’s “time to start cutting,” likely starting on September 18 further supports decisions by the Bank of Canada to make cuts, without risking pressure on the Canadian dollar or trade economy. “As the Consumer Price Index falls closer in line with the bank’s 2% target, the concern is shifting from inflation’s progress to whether the economy will indeed achieve a soft landing," says Graham. “The key commentary in the upcoming rate announcement will centre on how weakness is unfolding in Canada’s labour market.” “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 both Canada and in the US,” she adds. “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 is likely to push them down further, pending any unexpected economic events.” With movement in mortgage rates, and an anticipated uptick in housing markets this fall, Graham says mortgage borrowers should shop around. “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 Bank of Canada’s rate hiking cycle, nothing is certain,” she says. “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.” “Real estate market activity has been resistant to the rate cuts we’ve received so far, but that could soon change as the impact of additional rate decreases compounds and materially improves affordability conditions for borrowers.” Graham says there is a downside to rate cuts for some investors. “While impending rate cuts are a good news story for borrowers, passive investors and savers have less to cheer about,” she says. “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.”
