Early holiday gift for Canadians as the Bank of Canada (BoC) announced a Santa-sized rate cut of 0.50%, reducing its policy rate to 3.25%. This follows the earlier trend of monetary easing that began in June 2024. Most bank prime rates are now expected to drop to 5.45% (from 5.95%), offering some relief to borrowers.
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This move marks a significant departure from the BoC’s aggressive rate hike cycle that spanned over two years, from March 2022 to June 2024, when rates rose from 0.25% to a peak of 5.0%.
Rate Cut Highlights
- BoC Policy Rate: Reduced to 3.25%
- Prime Rates: Expected to drop to 5.45%
- Next Rate Decision: January 29, 2024
Why is the Bank of Canada Cutting Rates?
The rate cuts are a response to the ongoing economic slowdown, characterized by weakening demand, excess supply, and persistent challenges in the Canadian economy. Here’s a deeper dive into the factors influencing the BoC’s decision:
Inflation: Stabilizing but Still a Concern
- Headline Inflation: Increased slightly in October 2024 to 2.0% (up from 1.6% in September), in line with the BoC’s target.
- Core Inflation: Rose to 2.6% from 2.4%, a slight deviation from earlier expectations.
- Key Contributors: Rising shelter and grocery costs remain a concern, although inflation excluding shelter costs sits at just 0.9%.
Labour Market Weakness
- Unemployment: Rose to 6.8% in November 2024, marking the highest level since 2017 (excluding pandemic years).
- Job Creation: While 50,000 jobs were added, 90% were in the public sector, signaling limited private-sector growth.
- Wage Growth: Slowed to 4.1%, with private-sector wages increasing at a modest 2.7%.
Sluggish Economic Growth
- GDP Growth: Only 1.0% in Q3 2024, falling short of the BoC’s forecast of 1.5%.
- Per Capita GDP: Declined for the sixth consecutive quarter in 2024, signaling underperformance compared to potential.
A Warning About Canadian Fixed Mortgage Rates
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Variable vs. Fixed Mortgage Rates in 2025: FOMO or JOMO — Which Strategy Wins?
How Do Falling Rates Affect Mortgage Holders and Buyers?
The BoC’s decision to lower rates has a direct impact on mortgage rates, making borrowing cheaper and potentially spurring housing market activity.
Improved Affordability
- Lower mortgage rates can make monthly payments more manageable for both new buyers and those renewing their mortgages.
- Fixed and variable mortgage rates are expected to drop further as the BoC continues its rate-cut cycle.
Increased Housing Demand
- The fall in rates often leads to an uptick in housing market activity, particularly during the spring buying season.
- However, rising demand could drive up home prices, potentially offsetting affordability gains.
Potential Risks
- A hot housing market could push inflation higher, countering the BoC’s efforts to stabilize the economy.
Economic Challenges Heading into 2025
Despite rate cuts, several headwinds could influence the trajectory of mortgage rates and economic growth in 2025:
Household Debt
- Canadian households remain heavily indebted, leaving little room for increased consumer spending.
- Rising debt servicing costs over the past two years continue to strain budgets.
U.S. Economic Uncertainty
- With the U.S. entering a period of rapid growth under new economic policies, Canadian exporters face potential challenges, including new tariffs.
- A weakening Canadian dollar against the U.S. dollar adds inflationary pressure.
Labour Market Concerns
- Weak private-sector job creation and slowing wage growth point to a fragile economic foundation.
Mortgage Rate Forecast for 2025
Further Rate Cuts Expected
- Analysts predict the BoC will continue cutting rates in 2025, with a projected reduction of 0.75% by year-end, potentially bringing the policy rate to 2.50%.
What Is the Neutral Rate?
- The neutral rate is where monetary policy neither stimulates nor restricts the economy. Economists currently estimate Canada’s neutral rate at 2.75%–3.0%.
Long-Term Rate Outlook
- Assuming inflation remains stable, the BoC is expected to maintain rates closer to the neutral range, stimulating the economy while keeping inflation in check.
Calgary Housing Market Forecast 2024, 2025, 2026 & 2030
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Oakville Housing Market Prediction for 2025: Trends & Visual Forecast
Toronto Home Prices Poised for a 5% Surge in 2025, Royal LePage Forecasts
Canada Real Estate Market Forecast 2024-2029: Steady Growth Amid Changing Interest Rates
What Does This Mean for You?
If you’re a homeowner or a prospective buyer, here’s what you should consider:
- Variable-Rate Mortgage Holders: You could see lower monthly payments as prime rates drop.
- Fixed-Rate Mortgage Holders: Locking in a lower rate might make sense if you’re renewing soon.
- Buyers: Lower rates improve affordability but keep an eye on rising home prices.
- Savers: Falling rates may reduce returns on savings accounts and GICs, encouraging investment in other areas.
Bank of Canada Announces Another Rate Cut and Updates Mortgage Rules
Final Thoughts: Is Relief in Sight?
As the BoC continues its rate-cutting cycle, Canadians can look forward to lower borrowing costs in 2025. However, the economic environment remains uncertain, with potential challenges from global and domestic factors.
Stay informed and consider consulting a mortgage advisor to navigate these changing times effectively. Whether you’re renewing, refinancing, or purchasing a home, understanding how these trends impact your financial situation is key to making the best decisions.
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