Where the Bank of Canada Rates Have Been and Where They Are Going

The Bank of Canada (BoC) is the country’s central bank, and its decisions on interest rates have significant impacts on the economy. Whether you’re buying a home, looking to invest, or simply trying to save, keeping an eye on the BoC’s rate movements can help you make informed financial decisions. Let’s take a look at where the rates have been recently, and what we might expect in the future.

A Quick Look Back: Interest Rates During the Pandemic:

The pandemic led to unprecedented economic disruption. To help support Canadians through this challenging time, the BoC slashed its overnight rate to a historic low of 0.25% in March 2020. This was part of a broader stimulus strategy to encourage borrowing and spending, keeping the economy afloat while much of the world was in lockdown. For almost two years, rates remained at rock-bottom levels, making borrowing more affordable. Mortgage rates, in particular, hit record lows, sparking a real estate boom across the country. However, low rates also meant cheap money flooded the market, contributing to rising asset prices and inflationary pressures.

The Shift: Rate Hikes in Response to Inflation:

Fast forward to 2022-2023, and the global economy began to emerge from the pandemic-induced recession. However, supply chain disruptions, pent-up demand, and a surge in commodity prices (especially energy) caused inflation to spike worldwide. Canada was no exception. In response, the BoC began to tighten monetary policy.

The first rate hike came in March 2022, raising the overnight rate from 0.25% to 0.50%. Since then, the Bank of Canada has moved aggressively, with several more increases to address the country’s inflation, which peaked at around 8% in mid-2022.

By early 2024, the BoC’s overnight rate stood at 5%, the highest level since 2001. While these moves have begun to cool inflation, they’ve also slowed economic growth, particularly in housing and consumer spending.

Where Are Rates Going? The million-dollar question! There are two key factors driving future rate decisions: inflation and economic growth.

Inflation:

Inflation has started to slow, but it remains above the BoC’s target range of 2%. The central bank will likely continue to prioritize inflation control until it is confident inflationary pressures are sustainably under control. Many economists expect modest additional rate hikes could still be on the table in the short term, but we may be nearing the peak of this rate-hiking cycle.

Economic Growth:

On the flip side, higher rates are starting to bite. Housing markets have cooled considerably, with mortgage affordability being a real issue for many Canadians. Some sectors are showing signs of slower growth, and there are growing concerns about a potential recession.

What has happened in 2024?

In 2024, the Bank of Canada (BoC) has shifted its approach to interest rates, cutting them three times so far. The year began with the overnight lending rate at 5%, but by September, it had dropped to 4.25%. These rate cuts came in June, July, and most recently in September, each time reducing the rate by 25 basis points. The BoC has moved into this “cutting phase” to address cooling inflation and a slowing economy.
Inflation has been easing throughout the year, dropping to 2.5% by August, which aligns with the BoC’s target of 2%. These cuts are designed to stimulate economic growth while managing inflation risks. For borrowers, especially those with variable-rate mortgages, the rate cuts have reduced borrowing costs, offering some relief after years of rising interest rates. However, the effects on fixed mortgage rates have been more modest, as they are influenced by bond yields rather than directly by the BoC’s rate.
What this has resulted in for lending is our bank prime is currently sitting at 6.45%, which is down from 7.20% at the beginning of 2024. Keep in mind not all lenders use the same Bank Prime, and you may be at a lender who sets their lending prime higher than most.

The BoC is expected to continue cutting rates into 2025, depending on economic conditions, which could push rates even lower over time.

What Does This Mean for You?

For homeowners, potential buyers, and investors, it’s important to plan ahead. If you have a variable-rate mortgage, keep an eye on your payments as rates may climb a bit higher. For those considering locking in a mortgage, now could be the time, as the rate environment may stay elevated for a while.
Meanwhile, for savers, the silver lining of higher interest rates is better returns on savings accounts and GICs. If rates stay high, it could be a good time to take advantage of these more attractive yields.

To learn more about renewing your mortgage, please reach out to Patricia 403.875.2969 or Stacey at 403.850.7738.

Visit our website at www.unbeatablemortgages.ca

Patricia McKean, a Lead Planner with the Unbeatable Mortgage Team at Mortgage Architects in Olds, has over 20 years of experience in lending and has been successful in helping a number of our rural clients obtain mortgages in Alberta.

Mortgage Architects
Olds, Alberta
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patricia.mckean@mtgarc.ca
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