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Will Interest Rates in Canada Go Down in 2023?

Will Interest Rates in Canada Go Down in 2023?

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Understanding how interest rates are influenced in Canada is crucial for investors and borrowers alike. Currently, inflationary pressures in Canada have shifted from goods to services, with demand for services being more sensitive to price changes. 

Though Canadian inflation is above the Bank of Canada’s target of 2%, it is expected that the policy rate will be maintained at 4.5% for the rest of 2023. Factors such as changes in the real estate market, population growth, and demographic shifts have also influenced interest rate decisions. 

However, predicting the exact path of interest rates in Canada is challenging due to various factors that can impact economic conditions. Some experts anticipate a potential drop in interest rates in late 2023 or early 2024, while others raise concerns about the impact of current interest rates on borrowing and the possibility of a financial crisis.


Key Highlights

  • Inflationary pressures, particularly driven by increasing prices in the service sector, influence interest rates in Canada.
  • The Bank of Canada sets a target inflation rate of 2% as a benchmark for price stability, and these current changes in interest rates by the BoC can impact borrowing costs, spending, and economic activity, which in turn can affect the level of inflation in the country.
  • There are several different opinions and projections from experts regarding the potential direction of interest rates in 2023, but the actual path of interest rates over the next year will depend on multiple factors and may not follow a straightforward pattern.

How Interest Rates are Influenced in Canada

Inflationary pressures in Canada initially stemmed from rising prices of goods, but this trend has slowed down over the past six months. 

Currently, most inflationary pressure is driven by increasing prices in the service sector. Demand for services tends to be more responsive to price changes than demand for goods, as the demand for services is more elastic, meaning it is more sensitive to price changes.

While it is impossible to accurately predict interest rates with certainty in any economy, including Canada, we understand the various factors that influence interest rates. By taking into account these factors, we can differentiate between more probable and less probable paths for interest rates.

Will Interest Rates Climb to a New All-Time High?

Based on an analysis in April 2023, it’s expected that the Bank of Canada (BoC) will maintain its policy rate at 4.5% for the rest of 2023, even though Canadian inflation is currently at 5.2%, significantly above the BoC’s target of 2%. The BoC has determined that the neutral policy rate, which is the overnight rate that promotes stable economic activity without causing an economic slowdown or acceleration, is around 2.5%.

When comparing today’s Canadian interest rates to the all-time high, it’s important to consider that a 1:1 comparison may not be accurate due to several factors that have changed over time, such as average home prices and the number of units per capita.

The real estate market has experienced notable growth, particularly in urban areas, leading to higher home prices. This increase in home prices has resulted in larger mortgage loans and higher debt levels for Canadian households. As a result, the affordability of housing has changed, and the impact of interest rate changes on monthly mortgage payments has become more significant. 

The number of housing units per capita has also changed over time. Demographic shifts, population growth, and changes in urbanization patterns have influenced the supply and demand dynamics of the housing market. In some regions, there may be increased demand for housing due to population growth, resulting in tighter housing markets and higher prices.

Understanding the Path to Inflation & How Inflationary Policy Impacts Rates

When inflation is too high, it can erode the purchasing power of money, as it takes more money to buy the same goods and services. Conversely, when inflation is too low, it may signal weak demand in the economy and hinder economic growth. The BoC has set a target inflation rate of 2% as a benchmark for price stability.

When the BoC wants to stimulate economic growth and increase inflation, it may lower the policy interest rate. Lower interest rates can encourage borrowing and spending, as they reduce the cost of borrowing for businesses and individuals. This can lead to increased consumer spending, business investments, and economic activity, which in turn can contribute to higher inflation.

Understanding the path to inflation and how inflationary policy impacts interest rates in Canada involves recognizing how changes in interest rates by the BoC can influence borrowing costs, spending, and economic activity, which in turn can impact the level of inflation in the country

When are Interest Rates Going Down?

If you’re hoping interest rates will go down sooner rather than later this year, you might be disappointed. Several economic projections indicate that interest rates will only begin to go down sometime during the final quarter of 2023 or in the first quarters of 2024. 

According to an analysis by Wealth Professional, a former governor of the Bank of Canada has expressed the view that interest rates are unlikely to decrease in 2023. Furthermore, there are concerns raised by various experts that the current interest rates could have a significant impact on borrowing, potentially leading to an unprecedented financial crisis. 

Meanwhile, there are advisors who hold the view that interest rates will not remain unchanged and are anticipating a potential drop in rates in late 2023 or early 2024, although they acknowledge the possibility of alternative scenarios.

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Will Interest Rates Go Down in 2023?

The actual path of interest rates in Canada in 2023 will depend on a multitude of factors that are subject to change and uncertainty. Economic conditions can evolve, and unforeseen events can impact interest rate decisions, making it difficult to predict with certainty whether interest rates will go down, stay the same, or increase in 2023. Experts predict they likely won’t increase much more than we have already seen, which is good news. 

An analysis by WOWA contends that the Canadian economy will start feeling the impact of the current restrictive policy rates by the first half of 2024, leading to reduced demand for both goods and services. As a result, it expects inflation to decrease and move closer to the target range of 1%-3%. Given the controlled inflation and sluggish job market, it’s expected that the BoC will gradually lower its policy rate toward the neutral level. 

Final Thoughts

While inflationary pressures have initially stemmed from rising prices of goods, the trend has slowed down in recent months, and most inflationary pressure is now driven by increasing prices in the service sector. The Bank of Canada has set a target inflation rate of 2% as a benchmark for price stability, and its decisions on interest rates are aimed at promoting economic growth and maintaining stable inflation.

The actual path of interest rates in Canada in 2023 is uncertain and subject to change based on various economic conditions and unforeseen events. While some projections indicate that interest rates may begin to go down in late 2023 or early 2024, there are also concerns about the potential impact of current interest rates on borrowing and the possibility of alternative scenarios.

Overall, it is expected that the BoC will gradually lower its policy rate toward the neutral level due to controlled inflation and a sluggish job market. However, the exact timing and direction of interest rate changes in Canada in 2023 remain uncertain and will depend on evolving economic conditions.


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