Could an oversized rate reduction be on the way?
The Bank of Canada (BoC) is preparing for its final rate announcement of 2024 on December 11, with economists anticipating a potential further reduction in its lending rate that could impact borrowing costs for Canadians.
TD Economics predicts that the central bank will decide on a 25-basis-point cut and thus proceed to bring down the current lending rate from 3.75% to 3.50%. However, this does not rule out the prospect of an altogether more significant reduction.
"We think that the Bank of Canada will move forward with a 25-basis-point reduction, but there is still the chance it could cut by 50 basis points," TD Economist Marc Ercolao shared. He added that the decision will be complex, noting significant economic data expected before the announcement, including GDP reports and labour market updates.
This announcement comes within the context of recent inflation trends, and Statistics Canada's latest inflation report showed a reacceleration to 2.0% in October, up from 1.6% in September. While slightly ahead of market expectations, Ercolao feels that this trend is unlikely to give the central bank significant pause for thought.
"The BoC is likely to view the inflation data as a minor setback," he explained. "Inflation isn't raising any red flags yet, but the report is a reminder that getting price growth to settle will take time."
What might be the impact of a December rate cut?
The potential rate cut could have massive implications for borrowers. The lending rate from the BoC directly influences the interest rates banks charge on financial products such as loans and variable-rate mortgages.
"We don't often see large swings in borrowing rates on a day-to-day basis, but we do expect to see mortgage and other consumer loan rates slowly drift lower over the coming quarters," Ercolao said.
Mortgage holders might feel the impact in various ways depending on the type of loan:
- Variable rate mortgage holders will see more of their payments applied to the principal
- Owner-occupiers with fixed rate mortgages will not feel any immediate impact as the rates are pegged to five-year bond yields
What’s next for the Bank of Canada?
TD expects Canada to see further rate cuts this year. "We are expecting a total of 150 basis points in cuts, bringing the present BoC lending rate of 3.75% down to 2.25% by the end of next year," Ercolao projected.
The Bank of Canada has eight rate announcements planned for 2025, and the first will be on January 29.
