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Trying to predict where prime rates will go (affected by Bank of Canada policy rate movements) has been a one-way ticket straight up until recently.
Yet, forecasting the first drop in rates has been a game of red light, green light — with stop-and-go volatile economic factors (like inflation’s trajectory) calling the shots.
The first drop in rates
With inflation cooling to below 3.0% from a peak of 8.1% in June 2022, the Bank of Canada is approaching its first interest rate decrease since March 2020. This move will affect floating variable-rate
We have a BoC rate announcement in a week, and I believe the central bank will leave rates alone for this one. It’s too soon, and we didn’t go through months of monster hikes just to undermine the drag on inflation, which is still above the BoC’s target of 2.0%.
In my estimation, we're still on track for the first drop to occur mid-year (June or July meeting). That may sound far away, but considering that we’ve endured the fastest rate-tightening cycle since the 1990s, it’s a welcome sight on the horizon.
How fast and far might rates fall?
Economic resilience has stymied experts at times, with the economy not quite behaving under the current (much) higher rates as expected. We’ve seen upside inflation numbers, job market strength, and growth surprises along the way.
But after the first drop hits, more aren’t far behind. I see prime rates falling by about 1.5% into the beginning of next year — and continuing in 2025 down another 0.50% (2.0% in total).
Rate cuts may speed up if the economy slows down too quickly. But at the moment, economists project an eventual higher neutral-rate resting point of 3.0% (up from a projected 2.5%).
The 'neutral rate' range will be a moving target over the coming months — we'll keep an eye on the numbers and update the total drop estimation as we go.
Is there a danger that prime rates will move up instead?
There's always that danger, though I think we’re done with any more hikes in this cycle. A second monthly inflation decline puts the pace of price increases into the central bank's target range of 1-3%, easing that fear.
Here are some economic factors we’re watching that could thwart rate-cut timing
- Strong wage growth continued, indicating entrenching inflation
- Increasing job gains
- A robustly growing U.S economy despite higher interest rates
- An unexpected Canadian economic growth spurt of 0.6% in January (in part spurred by U.S. growth)
- Worry about a housing market surge that could increase prices should rates drop too soon
- Increasing government debt levels, adding to inflationary pressures
- Global conflict that has the potential to drive oil prices higher
Yet despite these factors, there are also mounting signs of cooling across the board. Many experts have said that we can't hold rates at this level for too much longer. Damage could show up in full force through extensive job losses and economic contraction (recession) if rate drops occur too late.
How far will fixed mortgage rates drop?
Fixed mortgage rates have stutter-stepped down (about 0.8%) since a recent peak in October 2023.
Fixed rates are steered by the Canadian bond market and (eventually) follow the movements in bond yields up or down. Their recent volatility is typical when prime rate drops are expected.
Bond yields anticipate where prime rates may go. By the time we see the first prime rate drop, fixed rates will probably already be another 0.2-0.4% lower as mortgage lenders compete for elbow room by offering steeper deals.
If prime rates continue declining, fixed rates will also, though likely not as far as variable rates — this riskier rate type is typically lower than fixed rates (during ‘normal’ rate times).
To help you with your home-buying or renewal decisions, keep up with the latest economic and rate expectations through my Mortgage Rate Forecast blog.
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