Key Takeaways:
- The Bank of Canada is set to make its next rate announcement on December 11
- TD Economics predicts that the central bank will lean towards a cut of 25 basis points, bringing its lending rate down to 3.50%
- However, a cut of 50 basis points cannot be ruled out
- Cuts to the central bank’s lending rate could make it cheaper for Canadians to borrow money
Many Canadians are hoping to get an early holiday gift this year of another Bank of Canada (BoC) rate cut.
On December 11, the central bank will make its final rate announcement for 2024, and most economists are expecting another cut. The question is: by how much?
TD Economist Marc Ercolao said that he and his colleagues predict the BoC will slice its lending rate by 25 basis points, bringing it down from its current rate of 3.75% to 3.50%.
The BoC cut its lending rate by 50 basis points in October, which was its largest single cut since March 2020. Before the October rate cut, the central bank cut its lending rate by 25 basis points three times in a row in June, July, and September.
“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,” Ercolao said.
“There is still a high degree of uncertainty surrounding the next announcement; there is a lot of data coming out between now and then, including an important GDP report, a labour market update, and a handful of other indicators that will provide a snapshot of how the economy is evolving.”
Supporting the prediction of a 25-basis point cut is the latest Statistics Canada inflation report, which showed inflation reaccelerated to 2.0% in October, up from 1.6% in September. This reading was a little hotter than most market participants expected, Ercolao said, and suggests that the BoC’s goal of stabilizing inflation won’t be a smooth path.
“The BoC is likely to view the inflation data as a minor setback,” Ercolao said. “Inflation isn't raising any red flags yet, but the report is a reminder that getting price growth to settle will take time.”
What a rate cut could mean for Canadians
The BoC’s lending rate influences the interest rate banks charge customers on financial products such as loans and mortgages. So, any time the central bank cuts its lending rate, Ercolao said, it can become cheaper for Canadians to borrow money.
“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.
For Canadians with variable rate mortgages, rate cuts can mean more of their money goes toward the principal on their mortgage, and less towards interest.
For Canadians with fixed rate mortgages, a BoC rate cut will not immediately make an impact. Fixed rate mortgages are based on five-year bond yields, Ercolao said, and financial markets have already been expecting the BoC to cut rates this year. Those expected cuts, to some degree, are already factored into bond yields, and are therefore reflected in current fixed mortgage rates.
But if the central bank keeps cutting its lending rate in 2025, there could be a further impact on fixed rate mortgages.
Looking ahead
The BoC’s December 11 rate announcement is the final one for this year.
The BoC has eight rate announcements scheduled for 2025, the first to be held on January 29. Ercolao and his colleagues at TD Economics believe there will be more rate cuts in the new year.
“We are expecting a total of 150 basis points in cuts, bringing the current BoC lending rate of 3.75% down to 2.25% by the end of next year,” Ercolao said.
So, for homeowners, both prospective and current, and people looking to borrow money, TD Economics is predicting that more interest rate relief is hopefully on the way.