The upcoming Bank of Canada policy meeting on December 11 has sparked debate: Will the Bank cut rates by 25 basis points or 50 basis points?
Since our last interest rate update, the federal government has announced a stimulus package. This package initially had two parts: a short-term selective GST holiday and a set of stimulus cheques that would be sent out in the new year. However, due to insufficient opposition support for the stimulus cheques, the government has moved forward with the GST holiday, which recently passed its first reading in Parliament.
For the Bank of Canada, several factors suggest a more cautious approach at its next meeting: the stimulus package, a more cautious stance by the Federal Reserve, and an upside miss on inflation. Add to that uncertainty about US tariffs and the possible policy response by the Canadian government, and the Bank’s path to a neutral policy stance has become increasingly uncertain.
The latest GDP numbers, which came out in late November, show real GDP growing at a tepid 1.0 per cent annually in Q3. While Q4 GDP could see some acceleration, the economy is growing at a slower pace than the Bank of Canada had projected. Normally, this would support the case for a 50-basis-point rate cut. However, additional data that came out alongside the most recent GDP numbers brought significant upward historical revisions for the last three years, as well as modestly higher numbers for the first half of this year. The revised figures now peg GDP at 6.0 per cent (previously 5.3 per cent) in 2021, 4.2 percent in 2022 (previously 3.8 per cent), and 1.5 per cent in 2023 (previously 1.2 per cent). Statistics Canada also revised GDP for the first half 2024 upward by two-tenths of a percent.
Despite sluggish growth over the summer, these revisions make a 50-basis-point cut less likely.
Fixed mortgage rate outlook
A 25-basis point cut appears to be the most likely outcome. But what does this mean for fixed mortgage rates?
The bond market has taken a more cautious tone since the November 19 CPI release. Five-year yields peaked at 3.439 per cent on November 21 before easing back down to 2.945 per cent by the GDP data release date. These yield movements have largely been in sympathy with US Treasuries, with 5-year notes easing 24 basis points from November 21 to November 29.
Amid persistent US inflation concerns and mixed messaging from Federal Reserve officials about the potential scope of future rate cuts, fixed mortgage rates may remain range-bound even as the Bank of Canada lowers its overnight rate.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
How did banks and trusts rise as dominant mortgage lenders? Why did the five-year mortgage become the gold standard? And what role does innovation play in keeping the mortgage system resilient? Explore the answers in the second and final installment of our series on the evolution of Canada’s mortgage market.
Read more in the latest Housing Affordability Watch: The Evolution of the Canadian Mortgage Market: A Brief History – Part 2
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