The Bank of Canada (BoC) announced a 50-basis point reduction in the policy interest rate on December 11, 2024, in response to recent labour market data and economic indicators.
Bank of Canada’s December 11, 2024, Interest Rate Announcement:
- Previous Policy Rate: The BoC’s policy rate stood at 3.75%, following a 50-basis-point reduction in October 2024.
- Economic Indicators:
- GDP Growth: The Canadian economy grew at an annualized rate of 1% in the third quarter, below the BoC’s forecast of 1.5%.
- Inflation: September’s inflation rate was 1.6%, under the BoC’s 2% target.
- Rising Unemployment Rate: November saw Canada’s unemployment rate increase to 6.8%, the highest in nearly eight years outside of pandemic periods, despite the addition of 50,500 jobs. This has resulted from a growth in the available workers or labour force.
- Market Expectations:
- Market Anticipation: Financial markets have already priced in the rate cut, based on an 80% probability of a 50-basis point reduction.
- Bank Forecasts: RBC expected a 50-basis-point cut, bringing the rate to 3.25%.
Fixed Mortgage Interest Rates in Canada for Early 2025:
- Current Rates: As of December 9, 2024, the lowest five-year fixed insured mortgage rate was 4.44% and we expect a decrease this week.
- Influencing Factors:
- Bond Yields: Fixed mortgage rates are influenced by Canadian bond yields, particularly the five-year bond yield which is now 2.80% down from 3.28% after the US Election and up from 2.68% at the middle of September.
- Economic Conditions: Slower GDP growth and inflation below target may lead to further BoC rate cuts, potentially lowering fixed mortgage rates.
- Forecasts:
- Downward Pressure on Fixed Rates: A reduction in the policy rate is expected to lead to lower fixed mortgage rates, making borrowing more affordable for consumers.
- Rate Decreases: The Big 6 Banks anticipate rate decreases of 75 to 125 basis points in 2025, which could lower fixed mortgage rates. This would leave us with a Bank Rate of 2.50 to 3.00%.
- Potential Stabilization: Some experts warn that fixed mortgage rates may not significantly decrease despite BoC cuts, due to factors like bond market conditions. Frances Donald, RBC’s Chief Economist said recently there is a risk of rates rising in the USA by the end of 2025.
Considerations for Borrowers:
- Variable vs. Fixed Rates: With anticipated BoC rate cuts, variable rates may become more attractive. However, fixed rates offer stability against potential future rate increases.
- Economic Uncertainty: Global economic factors, such as potential U.S. tariffs on Canadian imports, could impact Canada’s economic outlook and interest rates.
- Global Economic Factors: The Canadian dollar has weakened against the U.S. dollar, partly due to expectations of rate cuts and potential U.S. tariffs on Canadian imports, which could impact the broader economy.
- Housing Market Dynamics: Lower mortgage rates may stimulate the housing market by increasing affordability, but economic uncertainties could temper this effect.
In summary, the BoC interest rate announcement of a cut on December 11, 2024, is in response to slower economic growth and low inflation. We believe there is more recessionary risk than interest rate risk. Borrowers should stay informed and consider both fixed and variable rate options in this evolving economic environment. The rate cut by the Bank of Canada reflects efforts to support economic growth amid rising unemployment and modest inflation. Consumers can expect more favourable fixed and variable mortgage rates in the first half of 2025, though ongoing economic developments will play a crucial role in shaping the financial landscape.
