Industry News

Bank of Canada Shifts Outlook From Rate Hikes to When to Lower

Bank of Canada Shifts Outlook From Rate Hikes to When to Lower

Table of contents

    Inflation and the impact on homebuyers, mortgage renewals, and refinances have all been impacted by quantitative tightening and the Bank of Canada’s monetary policy shift. The BoC has moved away from threats of additional rate hikes if necessary and shifted its focus to maintaining interest rates. 

    Read on to learn more about the recent rate announcement and the implications of this shift.

    Key Takeaways

    • BoC maintained the policy rate at 5% and changed its tone on when rate cuts could occur.
    • Shelter costs remained the biggest contributor to inflation.
    • The Governing Council expects to reach the BoC’s 2% inflationary target in 2025.

    We’re curious…

    Are you a first-time buyer?

    Rate Announcement

    On January 24th, the Bank of Canada (BoC) maintained its overnight policy rate at 5%. Many economists expected the BoC to maintain the overnight rate, but the shift in tone from the Governing Council was somewhat unexpected. 

    Today’s rate announcement marked a shift in focus to how long rates will need to be maintained until they can finally be lowered. This contrasts with the BoC’s stance last year, which was more cautious, citing that rates could be increased further if necessary to avoid a re-emergence of inflation and higher rates.

    Inflation and Its Impact

    The Bank of Canada (BoC) expressed optimism about progress on inflation but cautioned that it needs to cool further. The consumer price index (CPI) closed the year at 3.4% in December, picking up speed from the prior month. 

    The BoC’s preferred inflation measure, the non-volatile component of the consumer price index, reached 3.7%, well above the BoC’s target of 2%. Governor Tiff Macklem noted that shelter costs remained the most significant contributor to inflation. While a softening in the demand outlook is helping to ease inflation, core inflation measures are not showing a sustained decline.

    Inflation Forecast

    According to the central bank’s forecast, CPI is expected to remain around the 3% mark and reach the 2% target sometime in 2025. This is about 3 years later than the central bank’s original forecast. According to Macklem, inflation is still too high, and underlying inflation pressures remain, so we need to give those higher rates more time to work through the economy.

    Economic Growth

    The Canadian economy has been in a holding pattern since mid-2023 as global economic growth slows and inflation accelerates across most economies. With inflation projected to remain close to zero through Q1 of 2024, Canadian consumers have been spending less due to rising prices and interest rates, while business investment has declined. Weaker growth has allowed supply to catch up with demand, with the economy now running with moderate excess supply. 

    Impact on Homebuyers

    The Bank of Canada’s more moderate tone on interest rates may provide some breathing room for homebuyers looking to enter the housing market. The market began to recover at the end of the year, with home sales increasing an unexpected 8.7% between November and December. 

    Mortgage Renewals and Refinances

    2024 is set to be a year of mortgage renewals, with nearly half of all Canadians coming up for renewal over the next 2 years. The bank’s decision to maintain the benchmark at 5% means borrowers will have more time to adjust to the higher rates they’ll face when renewing. 

    If you plan to refinance your mortgage this year, you’ll need to wait a bit longer for interest rates to drop significantly. 

    Future Outlook

    The next interest rate announcement by the BoC will be on March 6, while the next rate announcement by the US Fed will be on January 31. The Fed is expected to keep interest rates on hold. Still, economists will keep an eye out for any changes in tone that could indicate a different direction for US monetary policy. 

    It’s anticipated that the BoC will hold rates at its next announcement. However, there is a slight chance that we could see a 0.25% rate cut. 

    Final Thoughts

    The shift in policy language from tightening to the possibility of lowering interest rates is a major shift for the Bank of Canada. While this is welcome news for borrowers, the effects on inflation and growth will need to be carefully monitored in the months ahead.

    Ready to get started?

    In just a few clicks, you can see our current rates. Then apply for your mortgage online in minutes!

    Best Mortgage Rates


    0.00%3 Year Fixed

    Get Rates

    0.00%5 Year Fixed

    Get Rates
    Check more rates