Bank of Canada Decreases Policy Rate

Today’s Bank of Canada policy rate announcement marked another significant moment for Canada’s economy. The widely anticipated 50 basis points (0.50%) rate cut reduced the policy rate to 3.25%, reflecting the central bank’s attempt to address rising unemployment, weak GDP growth, and broader economic slack. This move also underscored the Bank’s commitment to balancing inflation control with fostering growth, an increasingly challenging mandate amid global uncertainties, new mortgage rules and regional vulnerabilities.

Economic Conditions Leading to the Rate Cut

Labour Market Struggles

Job growth in Canada and the US exceeded consensus forecasts in November, but bond-market investors reacted differently than expected. Canada’s unemployment rate rose to 6.8% this past month, its highest point in nearly eight years, excluding the pandemic period years 2020 and 2021. 

Typically, stronger hiring data would drive bond yields higher due to concerns over rising labour costs and inflation pressures. However, this time, investors focused on weaker underlying details, leading to a sharp drop in bond yields. In Canada, 51,000 new jobs were created—double the forecast—but the labour force grew by 138,000, pushing unemployment to its highest level since January 2017. The data highlights that labour supply is outpacing demand, underscoring a key economic imbalance. 

According to a Bank of Montreal report, adding 138,000 new job seekers is one of the record’s most significant labour force increases. For context, Douglas Porter, BMO’s chief economist, highlights that over the past 25 years, the US labour force has grown by an average of 94,000 per month—despite having a population more than eight times the size of Canada’s. This rising unemployment added urgency to calls for monetary easing, as higher joblessness dampens consumer confidence and spending, both critical to economic recovery.

Weak GDP Growth

Canada’s GDP grew by only 0.3% in the third quarter, missing the Bank of Canada’s forecast. On a per capita basis, GDP declined for the sixth consecutive quarter, falling by 0.4%. These figures pointed to deeper structural issues, including declining productivity and reduced household purchasing power.

Economic disparities across regions also became more pronounced:

• Alberta and Saskatchewan: Heavily reliant on energy exports, these provinces faced headwinds from weak oil demand and the looming threat of US tariffs on crude oil.
• Ontario and Quebec: Manufacturing hubs in these regions grappled with global supply chain disruptions, reducing output and export potential.
• British Columbia: While its housing market remained resilient, affordability challenges persisted, straining household finances.

Stable Inflation but Limited Concerns

Canada’s consumer Price Index (CPI) inflation rate rose to 2% in October after hitting 1.6% in September, within the Bank’s target range. Analysts noted that the uptick in inflationary pressures was primarily driven by temporary factors such as higher gasoline prices in October compared to September. The Bank prioritized addressing economic slack over immediate inflation control, recognizing that longer-term risks to growth outweighed short-term price pressures.

The Policy Rate Decision

In response to these challenges, the Bank of Canada reduced its policy interest rate by half a percentage point (0.50%) to 3.25%, bringing down Canada’s prime rate to 5.45%. At the start of this week, the bond futures market had already priced in an 89% likelihood of this move after weak job market data and disappointing GDP figures emerged in November.

Potential for Further Cuts

Some economists speculate that the policy rate might drop further, reaching 1.75% in 2025, a scenario lower than our mortgage rate forecast. The bond futures market signalled similar expectations, reflecting investor confidence that additional monetary easing would be necessary if economic conditions failed to improve.

Global and Fiscal Influences

External factors significantly influenced the Bank of Canada’s decision:

• The US Federal Reserve was expected to lower its federal funds rate (FFR) by another 0.25% at its December 18th meeting, increasing pressure on Canada to maintain competitive economic conditions.
• The potential imposition of US tariffs on Canadian crude oil poses a significant risk to provinces like Alberta, which rely heavily on energy exports. Such trade actions could exacerbate regional economic vulnerabilities and weaken national GDP growth.
• Political instability throughout Europe, particularly in Germany and France, increased global economic uncertainty. Meanwhile, slower growth in emerging Asian economies dampened demand for Canadian exports, further straining the economy.

Explore how these recent changes might influence your mortgage and financial planning.

How Bank of Canada Rate Changes Affect Your Mortgage Payments

For example, if you have a $500,000 mortgage secured at nesto’s 5-year variable low rate of 4.80%, your monthly payment would be $3,115.39. On every $100,000 balance, your mortgage payment will be $573.00, while your stress-tested mortgage payment will be $694.07.

_{Common mortgage amounts and corresponding mortgage payments on nesto’s 5-year variable low rate of on a 25-year amortization. Qualifying mortgage payment affects all new mortgages, which need to be qualified on stress-tested payment based on the contract rate plus 2% (6.80%).}

December 2023 vs. December 2024: What’s Different?

How has housing affordability evolved over the past year? The landscape has shifted dramatically. While renting provides an immediate housing solution, it doesn’t offer the long-term benefits of building equity through homeownership. Over the past year, rent prices have surged faster than homeownership costs, making it harder for renters to leap into the housing market. Delaying homeownership could mean missed opportunities and facing a stricter market. Let’s break down the costs and look at how renting compares to owning a home today.

Today, Canada’s benchmark home price is $707,700, while a year ago, it was $737,900, which has decreased by 2.7%. However, the lowest 5-year variable mortgage rate at nesto has decreased from 5.95% a year ago to today. These changes mean that Canada’s average monthly mortgage payment has decreased from $3,785.42¹ to $3,435.92². This implies that nationally, the average insurable mortgage payment decreased by 9.23% from a year ago. In comparison, during that same period, Canada’s average national rent increased by 0.5% from $2,075 to $2,122, which in dollars is $84 year-over-year.

TL; DR— Canada‘s monthly mortgage payment decreased by 9.23%. Meanwhile, average home prices decreased by 2.7%, and average national rents have increased by 0.5%. In dollars, mortgage payments have decreased by $349.50, average home prices have decreased by $24,700, and average national rents have increased by $84.

_{*1 and 2: Values for mortgage payments calculated based on nesto’s variable rate over a 25-year amortization period with a 20% downpayment using the average/benchmark home price in the stated month as reported by CREA for the location.}

Implications for Canadians Homeowners and Homebuyers

The rate cut provides immediate relief to adjustable-rate mortgage (ARM) holders, who will see reductions in their monthly payments. Variable-rate mortgage (VRM) holders will pay less towards their interest-carrying costs and more on their mortgage principal portions with each monthly mortgage payment. 

For new buyers, lower policy rates make borrowing slightly more affordable, potentially increasing demand in a housing market already grappling with supply constraints. However, the benefits were uneven:

• Fixed mortgage rates increased slightly as major banks raised rates despite subdued bond yields, reflecting concerns about future economic risks.
• Stricter mortgage stress tests continued to pose barriers for first-time homebuyers, limiting their ability to capitalize on lower rates.
• The upcoming increase in the purchase price to $1.5 million and 30-year amortization for insured mortgages on December 15th will lower the bar for downpayments, making buying a home more accessible for Canadians.

Borrowers with mortgages up for renewal may be able to curtail the mortgage stress test and shop for a more competitive rate to switch lenders at maturity. Deciding between fixed or variable mortgages may be harder in 2025 due to fluctuating margins for mortgage lenders. Short-term rates continue to drop as leading banks cut their discounts. Discounts on variable and adjustable mortgages are expected to narrow further as the Bank of Canada continues its monetary easing.

Mortgage and Homebuying Advice for Canadians

The Bank of Canada’s recent 50-basis-point (0.50%) rate cut has created new opportunities in Canada’s real estate market, particularly for urban condos. The Globe and Mail’s Rob Carrick recently likened urban condos to stocks, awarding them a “buy rating” for their ability to weather volatility and retain value. Home building lags far behind housing needed to support Canada’s growing population. Long-term appreciation suggests that these properties could be considered to be selling at a bargain if treated similarly to stocks, as seen through the adage “buy low, sell high.” With lower borrowing costs and a slowdown in new condo constructions, demand for such properties is expected to grow.

The rate cut also triggered significant market reactions, with Canada’s stock market showing robust performance despite global uncertainties. Investors had mainly anticipated the Bank’s decision, given weak GDP growth and rising unemployment, making the move a logical step to support the economy. Economists see the Bank as focused on addressing economic slack and fostering growth. However, concerns remain about the limits of monetary policy in resolving deeper challenges such as regional economic disparities and high household debt levels.

For Canadians, the decision highlighted the importance of financial adaptability. Variable-rate mortgage holders benefited immediately from reduced interest-carrying costs and monthly mortgage payments. At the same time, those nearing their mortgage renewal are encouraged to explore competitive rates in a more favourable lending environment. Real estate investors, particularly in urban markets, were reminded of the sector’s potential for steady returns, even in uncertain times. 

Final Thoughts

The Bank of Canada’s December policy rate cut was a decisive step to address Canada’s pressing economic challenges. By lowering the policy rate to 3.25% and Canada’s prime lending rates to 5.45%, the central bank aimed to stimulate economic growth, mitigate rising unemployment, and support struggling households and businesses. However, the move also underscored the limitations of monetary policy in addressing structural issues like inflationary pressures from potential blanket tariffs, housing affordability,  mortgage risks and productivity gaps.

Canadians adapted to this new economic reality and were reminded of the importance of proactive financial planning and a solid mortgage strategy. Canadians have opportunities to build resilience in uncertain times, whether through renewing or refinancing mortgages or aligning their long-term financial plans with mortgage rate forecast. 

Nesto’s Prime Time mortgage offer presents a compelling solution for those navigating this uncertain rate environment. With Prime Time, you get immediate savings through a variable rate that adjusts with each BoC rate cut, including an initial discount to compensate for potentially missing out on a lower fixed rate. Prime Time allows you to switch to a fixed-rate mortgage without penalty, offering a safety net to lock in your rate anytime.

If you’re getting ready for a mortgage renewal, a home purchase or a refinance, the best way forward is to speak with our mortgage expert. With as little as 5 minutes to complete an application, you’ll be well on your way to your best mortgage rate. Contact nesto mortgage experts today for personalized advice and tools to align your mortgage strategy with the latest economic trends. Let us help you turn uncertainty into opportunity.

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