The Bank of Canada has cut rates by 0.50%, a move that was widely anticipated. While there were some signals that they might take a more conservative approach, the drop in CPI inflation to 1.6% in September pushed the Bank to make this significant cut. The goal was to bring inflation down to 2%, which they expected to achieve by the latter half of 2025. However, inflation has not only hit the target but exceeded it—nearly a year ahead of schedule.

With this rate cut now in effect, what should we expect next from the Bank of Canada, and how might fixed mortgage rates respond?

 

Future Bank of Canada Rate Cuts

Now that the Bank of Canada has surpassed its inflation target, there’s room for additional, possibly quicker, rate cuts. At the start of 2024, forecasts predicted that the BoC would reduce rates by anywhere from 1.00% to 1.75% by year’s end, depending on the bank. We’ve now seen 1.25% in cuts so far, and with one more announcement scheduled for December 11th, another rate reduction is likely on the horizon.

CIBC predicts another 1.50% in cuts by the end of Q2 next year, while RBC is slightly more optimistic, expecting an additional 1.75% by the end of Q3. On the other hand, Scotiabank remains more cautious, forecasting only 0.75% more in cuts by the end of next year.

I’ll provide a full breakdown of the forecasts from all six major banks in an upcoming post, once they’ve updated their reports. Remember, these are projections and can change based on new data. While forecasts have been more positive lately, it’s important to stay flexible, as conditions can shift unexpectedly.

 

Did Inflation Drop Too Much?

The Bank of Canada has been aggressively working to reduce inflation, but there’s always a risk of going too far. Their goal is to slow down the economy—not stop it altogether. If inflation remains at its current level or drops even further, the Bank may need to cut rates more than initially expected. While this would provide great news for mortgage holders, it could indicate that the economy requires more stimulation to avoid stagnation.

 

Fixed Mortgage Rates Dropping?

Regular readers know that fixed mortgage rates don’t move directly in sync with the Bank of Canada’s rate decisions. So, even though the Bank cut its rate by 0.50%, this doesn’t mean we’ll see fixed mortgage rates drop by the same amount—or at all. Fixed rates are largely influenced by Government of Canada bond yields, which were up by just over 1% before the rate cut and haven’t budged much since. This lack of reaction from the bond market suggests that any drop in fixed rates is unlikely to happen immediately.

However, as more rate cuts occur, we should see fixed mortgage rates gradually decline. Since their peak in October 2023, fixed mortgage rates have fallen by roughly 2.00%, while the Bank of Canada’s rate has only dropped by 1.25%. A year ago, 3-year fixed rates were in the high 5% to mid-6% range. Today, the range is down to 3.99% to 4.24% for most owner-occupied properties—a significant improvement.

 

Final Thoughts

Even when expected, a rate cut is always a welcome relief, especially for those in variable-rate mortgages. And with another cut likely in December, followed by more into 2025, the outlook for mortgage rates remains positive.

As always, the financial world is unpredictable, and circumstances can change. But for now, things are looking up for homeowners and homebuyers when it comes to mortgage rates. Stay tuned for more updates as we move through this cycle of rate reductions.

You can read the full announcement from the Bank of Canada here.