The Bank of Canada (BoC), is set to make a rate announcement on June 5, and many Canadians are holding their breath hoping the central bank cuts its lending rate. That’s because the central bank's overnight lending rate influences how much financial institutions charge for products such as mortgages and loans.
But TD Economist James Orlando doesn’t think a rate cut will happen just yet.
According to Orlando, it is likely that the BoC will keep its overnight lending rate at 5%, which is the rate it has held since July 2023. Orlando is predicting the central bank will announce a rate hold because it's likely waiting for inflation to cool a bit more. The BoC prefers inflation to sit around 2%, and it’s currently at 2.7%.
Even if the central bank doesn’t make a rate cut in June, Orlando says the announcement might lend insight into what’s to come from the BoC.
“Even though we expect the current rate to be maintained, we are anticipating accompanying communication from the BoC that a rate cut will be coming soon,” Orlando said, explaining that TD Economics predicts the central bank will announce a rate cut the next time it is scheduled to make an interest rate announcement in July.
“We’re looking for some signal from the BoC to help bolster confidence that a lower rate could be coming in July.”
What could a rate hold mean for Canadians?
If the central bank does hold its overnight lending rate, not much will immediately change for everyday Canadians, Orlando says.
As a reminder, the BoC’s benchmark rate serves as a reference point for the interest rates that financial institutions charge to their customers on products such as mortgages and loans. So, if the lending rate remains the same, people with variable rate mortgages – mortgages that fluctuate with rate hikes or cuts – won’t have any immediate financial relief.
However, Orlando says that if the BoC signals that a rate cut is forthcoming, the bond market would react, and that, in turn, could impact fixed mortgage rates. This could benefit people looking to get a fixed rate mortgage.
“Bond yields would come down, and fixed mortgage rates could start coming down, even before the BoC starts cutting that interest rate,” he said. “So, if the BoC signals that this rate cut is going to happen, Canadians looking for longer-term mortgage products could see some relief.”
What could happen if a rate cut occurs in July?
If a rate cut is announced by the BoC in July, homeowners on a variable rate mortgage will see more of their money going towards the principal amount on their mortgage and less towards interest, Orlando says. That means a homeowner could possibly pay off their mortgage faster than in a higher rate environment.
For homeowners on a fixed rate mortgage, a rate cut could be helpful, but might not ease all affordability concerns.
According to Natasha Struminikovski, Associate Vice President, Product Group Owner, Homeowners Journey at TD, even if interest rates are expected to come down, people who have fixed rate mortgages, and have a renewal coming up, may renew at a higher rate – especially if they secured a mortgage during the thick of the pandemic when interest rates were at historic lows.
“The rate situation in 2024 is different than it was a few years back,” Struminikovski said.
“If someone has a mortgage that is coming up for renewal, it's an important time for them to take stock of where they are financially and understand their mortgage options. This can help them to better understand how a rate hold, or rate cut, might impact them.”
Struminikovski recommends TD clients who have a mortgage coming up for renewal reach out to a TD Mortgage Specialist sooner than later to understand their renewal options and how they might be impacted by a rate change.
Likewise, homebuyers wanting to purchase a home and looking to understand how a rate change could impact their mortgage options can also reach out to a TD Mortgage Specialist. Anyone can use the TD Mortgage Calculators and Tools, which can be found here.