The central bank is widely expected to lower rates again. Will it be 25 or 50 basis points?
The Bank of Canada’s final interest rate decision of 2024 is drawing nearer – and with a fifth rate cut of the year seemingly all but a done deal, the only remaining question seems to be whether it will move by 25 or 50 basis points.
TD Bank economists believe a 0.25% reduction is on the way next week (December 11), although they view a bigger move as a distinct possibility, while BMO’s Shelly Kaushik also highlighted the likelihood of a routine 25-basis-point cut.
Royal Bank of Canada (RBC), meanwhile, said after the release of the latest national GDP figures that the continuing sluggishness of the Canadian economy pointed to a 50-point cut by the Bank to round out the year.
The central bank’s decision is being closely watched by hopeful homebuyers and mortgage professionals alike as they wait to see how far rates might slide.
How would a jumbo rate cut impact the market?
Still, even a so-called oversized cut of 50 basis points won’t materially change the outlook for plenty of buyers in the current market, according to Valko Financial founder Tracy Valko (pictured top).
She told Canadian Mortgage Professional that while many consumers had been tracking the news to see whether that supersized discount might arrive, a big cut almost certainly wouldn’t see an immediate flood of new homebuyers in the market.
That’s because the gap between lowest fixed and variable rates on offer in the market, even with a big Bank cut, means it’s still a better option to go with a fixed option – which isn’t directly impacted by the central bank’s rate policy.
Shubha Dasgupta, CEO of Pineapple Financial, highlights optimism for 2025's mortgage market with rate cuts, 30-year amortizations, and strong consumer sentiment. https://t.co/gxNT924xF4#MortgageMarket #HousingAffordability
— Canadian Mortgage Professional Magazine (@CMPmagazine) December 2, 2024
“I tell any client right now: A lot of people are misunderstanding that bank prime,” Valko said. “The reduction in bank prime is not necessarily going to affect them on a preapproval because more than likely, most bank lenders and those in our broker space were approving people on fixed rates and it’s stress tested – fixed rates are still lower than where bank prime is.
“So even though a variable is a better product to take right now for a lot of clients because we know we’re in that declining rate environment, it’s not necessarily going to be an option of choice at the time of a preapproval because we want to help people get into homeownership – and it’s hard if that rate is stress tested and it’s still higher than where it should be right now.”
That’s not to say a further cut by the Bank of Canada wouldn’t be good news for the market. Valko is expecting a 25-basis-point reduction next week but wouldn’t be surprised by a larger move – “and the trend is decreases into 2025,” she said. “We have to understand that’s good momentum because that means we’re going to see [further progress] eventually.”
How have rate cut expectations changed in recent weeks?
The Bank of Canada has maintained a cautious tone on the prospect of further big rate reductions, with Governor Tiff Macklem’s suggestion that Canadians could “breathe a sigh of relief” on the economy hinting that its 50-point cut in October wouldn’t necessarily be repeated.
But a continuing economic slowdown – which saw growth dip to a 1% annualized rate in the third quarter compared with 2.2% in Q2 – has brought that prospect back into view.
Even though the central bank has been unwilling to comment on the likelihood of an oversized rate reduction next week, it’s been candid about the likelihood of further cuts in 2025, something that Valko said could be keeping homebuyers on the sidelines as they wait for rates to fall further.
That’s especially the case, she added, with many Canadians on the fringes of the market at present thanks to current rates. “It’s a real struggle for a lot of people who want to take variable, and we can recommend it, but ultimately they don’t qualify,” she said.
“So they say, ‘I’ll sit on the side until I see a couple of other decreases.’ The hope of most Canadians out there that haven’t bought and want to buy is that they’ll see the trend of rates coming down into the beginning of 2025.”
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