Central bank expected to lower rates significantly
The Bank of Canada is set to make its penultimate interest rate decision of the year this morning – and an oversized cut of 50 basis points is likely, according to Dominion Lending Centres chief economist Sherry Cooper (pictured).
That would mark the central bank’s single largest rate reduction since the end of March 2020, when it slashed its benchmark rate by 0.5% in response to the escalating economic crisis posed by the COVID-19 pandemic.
Market expectations of a larger-than-usual cut have surged in recent weeks amid sluggish labour market reports and an inflation figure that’s continued to fall – and Cooper said the Bank’s silence on those rumours suggests a jumbo reduction is on the way. “I think it’s a pretty good bet that they’ll go the full 50 basis points, because they don’t like to surprise the markets,” she told Canadian Mortgage Professional.
“That’s what I’m expecting, and I think it’s the right thing to do because the Canadian economy can’t survive interest rates at current levels. Monetary policy is just too restrictive, with the overnight rate at 4.25% when inflation is probably less than 2%.”
Inflation, labour market cooldown likely to spur oversized cut
At last reading, the overall consumer price index (CPI) dipped to 1.6%, although Cooper noted that was driven significantly by plunging gasoline prices in September, which have since rebounded.
While the Bank has successfully steered inflation down from its 39-year high of 8.1% in mid-2022, plenty of uncertainty is looming in the distance for Canada’s national economy – not least the outcome of a cliffhanger presidential election south of the border on November 5.
As economists anticipate a Bank of Canada rate cut next week, easing inflation is raising questions about its impact on the housing market. https://t.co/Tc7MJKOkRB#HousingMarket
— Canadian Mortgage Professional Magazine (@CMPmagazine) October 17, 2024
Rising unemployment, Cooper said, remains a significant risk for Canada, especially with job vacancies having diminished “dramatically” in recent months, while third-quarter gross domestic product (GDP) is also expected to reflect a darkening economic outlook. “I think we’ll see 7% [unemployment],” Cooper said, “which is kind of spooky for people, because there’s nothing worse than losing a job when it comes to trying to make your mortgage payment.”
Fears over mortgage renewals recede amid falling rates
After embarking on a rate-hiking cycle throughout 2022 and 2023, the Bank of Canada has trimmed interest rates in each of its last three announcements – with a further 50-point cut today set to bring its benchmark rate to 3.75%, down from 5% prior to the summer.
That spate of cuts, according to Cooper, could provide a shot in the arm for the housing market, especially with rates likely to slide further in the opening months of 2025. “Seasonally, this isn’t the time of year that you see a big burst of activity,” she said, “but I think for spring, when seasonally we do see a pickup, by then we could have the overnight rate fall to 2.5% by April – maybe even lower. That will make a big difference.”
It’s also likely to ease some of the concern that’s grown over a wave of mortgage renewals in 2025 and 2026. “If the markets get what they expect, a lot of people that renew in 2025 will not see an increase in their monthly payments,” Cooper said. “So that would be very good news for the housing market and for the economy in general.”
Rising interest rates sparked fears of a potential crisis caused by impending mortgage renewals at significantly higher borrowing costs than the original contract – but those worries have receded somewhat with the Bank firmly in rate-cutting mode.
Mortgage renewals will still weigh against the overall economy looking ahead – but they’re less of a concern than a softening job market, according to Royal Bank of Canada (RBC) economist Nathan Janzen.
In a recent note, he highlighted the shifting mortgage landscape. “The Bank of Canada’s 75 basis points of rate cuts so far (with much more to come) have already produced some rate relief for mortgage holders,” Janzen pointed out.
“A large chunk of one- to three-year mortgages will likely renew at lower interest rates and variable mortgage holders are already seeing some relief – either from lower debt payments (for variable rate, variable payment mortgages) or lower interest costs and larger principal payments (for variable rate fixed payment mortgages).”
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