Canada Interest Rate Forecast | Perch (2024)

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Canada Interest Rate Forecast 2023-2028

Interest rate forecast for 2023: 5.00%*

• December 2023 Canada Mortgage Rate Forecast 📊

For more information about the 2023 Bank of Canada rate announcement schedule and upcoming 2024 announcement schedule, read more here 👈

Key Takeaways (updated December 2023)

• The prime rate in Canada as of December 6th, 2023 is 7.20%. (last change: +0.00% on December 6th, 2023)
• On Wednesday, December 6th, 2023, The Bank of Canada announced that it will be holding its rate, keeping the policy rate at 5.00%.
• Recent data indicates inflation is decelerating toward the Bank of Canada’s target, coupled with slow economic growth.
• Compared to October’s outlook, the long-term normal interest rate has decreased by 0.50%
• Today’s best mortgage rates are5.39% for 5-year fixedand6.00% for 5-year variable.
• In November, Canada’s yearly inflation rate remained constant at 3.1 percent, in line with the preceding month’s figure, as per Statistics Canada’s recent data release.

2023 Predictions (updated December 2023)

• For December, Perch anticipates fixed rates will drop and variable rates will remain the same.
• Market expectations suggest no further rate hikes, with a likelihood of rate cuts starting in the second half of 2024.
• The anticipated pace of rate cuts remains around 0.25% per quarter over 1.5 years.
• Approximately 60% of mortgages are estimated to renew by 2026.
• Good news for borrowers as anticipated rate reductions of about 1% in 2025 and 1.5% in 2026 are expected to ease the impact of higher rates during renewal

Will Interest Rates in Canada Go Down in 2023?

On December 6th, the Bank of Canada held its interest rate at 5.00%. The next Bank of Canada announcement is scheduled for January 24, 2024.Commentary from Perch’s CEO and Principal Mortgage Broker, Alex Leduc:As a result of recent data showing inflation continuing its deceleration towards the Bank of Canada’s target and slow economic growth, the market now predicts no further rate hikes.Instead, it anticipates that rate cuts will likely start in the second half of 2024. While the pace of rate cuts is largely unchanged at approximately 0.25% per quarter over 1.5 years, the long-term normal interest rate has decreased by 0.50% compared to October’s outlook.Various sources estimate that 60% of mortgages are set to renew by 2026.Good news for borrowers: Anticipated rate reductions of about 1% in 2025 and 1.5% in 2026 will help ease the impact of higher rates during renewal.

When is the next Bank of Canada rate increase and what can I expect?

The current market overnight interest rate forecast for the remainder of 2023 is:

What is the interest rate forecast for 2023 in Canada? (updated December 2023)

Commentary from Ali Hussin, Head of Mortgage Advisory at Perch:

On December 6th, The Bank of Canada announced their decision to hold their Policy interest rate at 5.00%. The Central Bank has closed off 2023 with another rate hold, keeping at the current 5.00% Policy interest rate.

The Central Bank believes there’s now sufficient evidence pointing to slowing demand and increased probability of a recession, lead by slower consumption growth and a decline in housing activity, while still maintaining their hawkish and precautionary stance. Markets and Senior Economists are largely convinced there are no more rate hikes in the pipeline for Canadians and expect the first rate drop to come as soon as Q2. The Central Bank projects the economy will continue to cool down, bringing inflation back to its two per cent target some time in early 2025.

Alex Leduc, Principal Mortgage Broker and CEO of Perch predicts that there will be no change in December.

According to Alex Leduc, the real estate market is experiencing a shift in deal types. While purchases have slowed down and early renewals remain non-existent, refinances are more prominent. We see broadly that refinancing is being done for debt consolidation and re-amortization, which are more “survival” oriented refinances vs “growth” oriented refinances like taking out equity to buy a rental property or renovate a property. This is indicative of the challenging economic landscape where individuals and businesses are trying to navigate through uncertainties and are doing whatever they can to ride out peak interest rates until they can get some cash flow relief in a few years.

Perch believes that right now is a great time to buy. Short-term pain with higher monthly payments can result in long-term gain when rates start to drop and prices start to climb. Pent-up demand, immigration, and supply constraints should be contributors to potential rapid price appreciation in late 2024 and into 2025. Take advantage of the current market conditions if you can afford to do so.

How does inflation affect future Bank of Canada interest rate changes?

According to the Statistics Canada report published on November 21, the CPI showed a 3.1% year-over-year increase in October, down from the 3.8% gain in September. This deceleration was mainly due to a decrease in gasoline prices (-7.8%). Excluding gasoline, the CPI rose 3.6% in October. While prices for goods decelerated, prices for services increased at a faster pace (+4.6%), driven by higher costs for travel tours, rent, property taxes, and other special charges.

Perch believes this is a huge deceleration and will keep further bank hikes at bay.

In November, Canada’s yearly inflation rate remained constant at 3.1 percent, in line with the preceding month’s figure, as per Statistics Canada’s recent data release. Contrary to economists’ predictions anticipating a dip below the three percent mark, the rate held firm, keeping the economy in proximity to the Bank of Canada’s targeted two percent inflation rate. Notably, mortgage interest expenses and elevated rental costs persist as major factors influencing the inflation rate, experiencing increases of 29.8 percent and 7.4 percent, respectively, compared to the previous year.

What is CPI and how does it affect the Canada interest rate forecast?

CPI stands for consumer price index and it is the measure of average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. It is mainly used to measure inflation. A rising Consumer Price Index (CPI) would prompt the central bank to raise interest rates. The CPI basket includes 8 main categories of goods and services: Food, Shelter, Household operations, Clothing, Transportation, Health, Recreation, and Alcoholic beverages. CPI data is reported for various geographic areas, including Canada, provinces, and select cities, such as Whitehorse, Yellowknife, and Iqaluit.

Canadian CPI Release Schedule 2023-2024

• December 19, 2023
• January 16, 2024
• February 20, 2024
• March 19, 2024

What affects the Bank of Canada’s interest rate forecast?

The Bank of Canada’s interest rate forecast is influenced by a variety of financial, economic and geopolitical factors. Some of these include economic growth, inflation, labour market conditions, global economic conditions, consumer spending and more. Here are some recent numbers that will affect the Bank of Canada’s interest rate forecast decision:

• In October, Statistics Canada reported that the Consumer Price Index (CPI) rose3.1% on a year-over-year basis, down from a3.8% gain in September.
• Following an increase of 64,000 jobs in September, Canada’s employment rose by a further 18,000 jobs in October, falling short of estimates of 25,000 jobs.
• Job vacancies continued to decline, by 40,700 in September, there were 1.9 unemployed persons for every job vacancy in Canada, up from 1.8% in August, indicating the labour market tightness has eased, which will reduce upward pressure on wage growth.
• Canada’s 5-year bond yields have plummeted over80 basis points since they reached 16-year highs in October. Canada’s mortgage rates tend to track five-year bond yields at a premium and with a lag.

What is the Canadian prime rate?

The prime rate is what major banks and financial institutions in Canada use to set interest rates for loans and lines of credit which also include variable rate mortgages.

Is prime rate the same as mortgage rate?

The prime rate is not the same as your mortgage rate. A prime rate is the base cost of borrowing from which lenders start to determine interest rates on mortgages, personal loans, credit loans or other financial products. In general, the prime rate mostly affects variable rate mortgages. Your mortgage rate is the interest rate you are expected to pay on any borrowed money.

What is the mortgage interest rate forecast for 2023 in Canada?

On December 6th, the Bank of Canada announced a rate hold, keeping the interest rate at 5.00%.Ourcurrent best 5-year fixed rate is 5.39% and 5-year variable rate is 6.00%.

Recent data suggests slowing inflation and sluggish economic growth, leading the market to predict no more interest rate hikes. Instead, rate cuts are expected in the second half of 2024, maintaining a pace of about 0.25% per quarter over 1.5 years. The long-term normal interest rate has dropped by 0.50% compared to October’s outlook.

Around 60% of mortgages are estimated to renew by 2026, bringing good news for borrowers. Anticipated rate reductions of approximately 1% in 2025 and 1.5% in 2026 are projected to ease the impact of higher rates during renewal.

What are the interest rate predictions from the banks?

CIBC

CIBC economist Avery Shenfeld expected the Bank of Canada to hold their rate at 5.00% on December 6th.

RBC

RBC economists say that the December Bank of Canada interest rate decision was anticipated to maintain the current rate of 5%, marking the third consecutive meeting without a change. Despite a potential focus on inflationary risks and the option to raise interest rates, the prevailing economic indicators suggest a shift toward future rate cuts. Recent improvements in Canadian inflation data, with headline CPI growth at 3.1% in October, slightly above the Bank of Canada’s target range, provide a positive backdrop. However, concerns arise from sluggish economic performance, including a larger-than-expected contraction in Q3 GDP growth and a rise in the unemployment rate to 5.8% in November. While signs of a softening economy prompt speculation about the possibility of interest rate cuts, the expectation is for a cautious approach from the Bank of Canada, with a potential move towards rate cuts anticipated in Q3 of the following year, following a period of maintaining the status quo through the first half of 2024.

Scotiabank

Scotiabank economist, Derek Holt, believes that “there is such a crowded consensus of opinions across market participants and economists on what the Bank of Canada may do going forward that it’s worth dedicating this issue to a different narrative. While there is a strong case for what follows, the minimum hope is that it at least generates greater diversity of debate and discussion around the risks. I feel strongly that market pricing is on the wrong path and a little less strongly that the BoC is feeling uncomfortable about it and by enough to do something about it”. He also emphasizes the importance of the Bank of Canada’s (BoC) decision-making this week, highlighting the potential consequences of inaction. If the BoC chooses not to take any specific measures, the market is expected to intensify pressure for early and aggressive interest rate cuts. Holt argues against such cuts, citing limited evidence of progress against inflation and ongoing inflation risks. Market expectations already indicate a significant probability of a rate cut in January, and Holt warns that a passive stance from the BoC could lead to a prolonged period of runaway cut expectations. The communication this week is portrayed as a critical moment, with the BoC’s decisions potentially shaping its future relationship with the markets.

TD Canada

TD Bank senior economist James Orlando says “A hold today was the only option for the BoC. Given theeconomic backdrop, the BoC has likely gained greater confidence that its policy stance is sufficiently restrictive. There has been obvious weakness emanating from the housing market for a while now, but more recently, consumer spending has slowed alongside a further cooling in the labour market. But with inflation still above 3%, we get why the BoC isn’t ready to declare victory. Instead, the BoC seems like it is preparing to sit on the sidelines for the next couple of months while maintaining its cautious rhetoric”. Orlando believes that “markets don’t think the BoC will be able to get too comfortable. The next move is clearly a cut, with odds pointing to the first move in April. We agree. The next few months are going to be challenging given our expectation that theunemployment rate will continue to rise, which will hit consumer spending and bring inflation down along with it. No wonder the Canada 2- and 10-year yields have fallen approximately 90 basis points over the last two months”.

BMO

According to BMO economist Douglas Porter, “given the Bank’s goal of restoring its inflation-fighting credibility among the broader public, the BoC could very well wait as long as possible before shifting to a dovish bias and then to cuts. Assuming the economy doesn’t weaken materially further in the next few months, the policy rate trajectory is entirely dependent on the evolution of inflation. We suspect that while the underlying trend in inflation will improve in 2024, there will be bumps along the way, keeping the Bank on hold a bit longer than the market currently anticipates. But it is safe to say that the countdown clock to rate cuts has begun, even if the Bank isn’t saying so”.