The Bank of Canada (BoC) currently holds its policy rate at 4.25%, which is restrictive and is weighing down the Canadian economy. While this level of tight monetary policy was necessary to curb inflation when it was running high, the situation has clearly changed. Now, the BoC needs to consider a sharp reduction in its policy rate—and fast. A 0.50% rate cut would help shift the policy rate toward a more neutral range, where it neither restricts nor stimulates growth, which economists believe falls between 2.5% and 3%.

Inflation is Under Control

Last week, Statistics Canada confirmed that inflation, as measured by the Consumer Price Index (CPI), increased by only 1.6% year-over-year in September—well below the BoC’s 2% target. What’s more, if we exclude mortgage interest costs (which are tied directly to the BoC's previous rate hikes), inflation was only 1% last month. This is lower than many other countries around the world.

For comparison:

• China: +0.4%

• Euro Area: +1.7%

• UK: +1.7%

• South Korea: +1.6%

• New Zealand: +2.2%

With inflation cooling both at home and globally, the need for the BoC to keep its policy rate elevated has faded. Continuing on the current path is dragging down Canada’s economic momentum and causing more harm than good.

The Impact of Higher Rates on the Economy

Canada’s economy has been hit hard by the BoC’s aggressive rate hikes over the past year:

• GDP has declined on a per capita basis over five of the past six quarters.

• Consumers are increasingly stretched and cutting back on spending.

• Businesses are growing more cautious, which is widening the gap between Canada’s current output and its potential.

This trend highlights the urgent need for the BoC to make its policy rate less restrictive. A 0.50% rate cut could be just the move to help restore balance and prevent further economic slowdown.

Oil Prices and the Loonie

Rising oil prices briefly sparked concerns about inflation spiking again, but that surge was short-lived. Oil prices have now returned to their typical trading range, and global inflation continues to fall.

Meanwhile, the Canadian dollar (Loonie) has weakened against the US dollar, largely due to diverging monetary policy between the BoC and the US Federal Reserve. The weakening Loonie increases the cost of imports, which may put some upward pressure on inflation. However, BoC Governor Tiff Macklem has repeatedly stated that the Bank's policy rate can diverge more from the Fed's without needing immediate action to protect the currency.

For reference, the gap between the BoC and Fed policy rates has been much wider in the past. In 1997, the BoC’s rate was 2.50% lower than the Fed's, compared to today’s relatively small 0.50% gap. This suggests there’s still room for further divergence without major concerns for the Canadian economy.

The Bottom Line: A 0.50% Cut Makes Sense

With Government of Canada bond yields continuing to fall, many investors are betting that the BoC will implement a 0.50% rate cut at its next meeting. Lenders have already begun lowering fixed mortgage rates in anticipation, and we could see further reductions soon.

For variable-rate borrowers, it’s been a rollercoaster ride, and the ups and downs over the past few weeks are a reminder that variable rates are not for the faint of heart. That said, as inflation continues to decline, variable-rate holders may soon start to see some relief.

If you’ve been holding out for lower rates, now may be the time to act. With the BoC expected to cut rates, fixed mortgage rates are also likely to stabilize or drop in the coming weeks. Just out of curiosity, would it be helpful to discuss how these changes might impact your mortgage or future plans? Reach out today, and I can help you review your options.

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If you’re looking to buy a new home or are a current homeowner interested in knowing how much mortgage savings you could capture with these upcoming rate cuts, contact me today. I’ll help you navigate this evolving market and find the best option for your financial goals.

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Your Friend in the Mortgage Business,
Adam Walker
Walker Mortgages
226-567-4274 ext. 1
[email protected]

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