Borrowers may have welcomed recent rate cuts from the Bank of Canada, but TD Bank and CIBC predict an additional 175 basis points (bps) of easing by the end of 2025, lowering the overnight rate to 2.75%.
The recent half-percentage point rate cuts by the Bank of Canada over the past two months provided some relief for borrowers. However, forecasts suggest there’s much more to come. TD Bank and CIBC predict another 175 bps cut by the end of 2025, bringing the overnight target rate down to 2.75%. This prediction stands out among other major banks, with BMO predicting a 100 bps cut, Scotiabank expecting a reduction to 3.25%, and RBC projecting a 3% rate by Q4 2025.
CIBC’s Avery Shenfeld notes that an economy at full employment with on-target inflation typically requires interest rates at a neutral setting of 2.75%. However, rate pauses may occur in response to economic data.
TD’s senior economist, James Orlando, highlights inflation as a key indicator, along with continued economic weakness. The Bank of Canada’s latest Monetary Policy Report revised GDP growth forecasts down while maintaining its inflation forecast to reach the 2% target by 2026.
TD predicts long-term growth to slow to 1.8% annually, with population growth and consumer spending also decelerating. Consequently, TD expects the Bank of Canada to reduce its benchmark rate further to 2.25% by 2026, with easing inflationary pressures.
A History of BoC Rate Cuts
National Bank Financial points out that consistent and drawn-out easing cycles are not uncommon for the Bank of Canada. For instance, during the 2001 easing cycle, the Bank delivered 11 consecutive rate cuts, reducing the overnight rate from 5.75% to 2.00%, a total reduction of 375 bps over 12 months. CIBC notes that the Bank typically returns its policy rate to its neutral level within one or two years, except during significant economic shocks like the 2014 oil price collapse.
Implications for Mortgage Rates
If TD and CIBC's forecasts hold, the Bank of Canada’s overnight target rate could drop to 2.75% by the end of 2025, suggesting a prime rate of 4.95% for most lenders. This would mean significant savings for variable-rate borrowers. A reduction from the current prime rate of 6.70% to 4.95% would lower variable rates by 175 bps. For every $100,000 in mortgage debt, this reduction would save borrowers approximately $1,250 annually. On a $400,000 mortgage, the annual savings would be around $5,000, providing much-needed relief for borrowers.
As the Bank of Canada continues to lower rates, more borrowers might consider variable-rate mortgages, attracted by lower monthly payments and reduced interest costs. The interest in variable-rate mortgages has already begun to rebound, with 12.9% of new mortgage borrowers opting for them in the first quarter, up from a low of 4.2% in the third quarter of 2023.
Conclusion
The potential for significant rate cuts by the Bank of Canada brings hope for many borrowers. If TD and CIBC’s predictions come true, borrowers could see substantial financial relief. Keep an eye on economic indicators, particularly inflation, as they will guide the Bank’s decisions in the coming years.
Source From: Wealth Professional
Adapted by Jose Gustavo
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