OTTAWA, Jan 28 (Reuters) – The threat to the independence of the U.S. Federal Reserve is boosting economic uncertainty around the world, Bank of Canada Governor Tiff Macklem said on Wednesday in his strongest comments to date on the outlook for the Fed.
U.S. President Donald Trump has repeatedly criticized Fed Chairman Jerome Powell, demanding he cut interest rates. He is seeking to remove Fed governor Lisa Cook while the Department of Justice has threatened Powell with a criminal indictment.
Macklem made his remarks to reporters after keeping rates on hold amid what he called unusually high levels of uncertainty.
“I think the threat to the independence of the central bank in the United States is one thing that has sort of been contributing to this sense of uncertainty,” he said.
“The Federal Reserve is the biggest, most important central bank in the world, and we all need it to work well. A loss of independence of the Fed would affect us all,” he added, saying Canada would be particularly affected given its close economic links to the United States.
Macklem was one of the central bank heads who earlier this month issued a joint statement backing Powell. Last September, Macklem said Trump’s attempts to pressure the Fed were starting to hit markets.
Keeping central banks independent lets them take “difficult decisions” that benefit citizens, Macklem said.
“He is doing a good job at leading the Fed based on evidence, based on facts … I hope it stays that way. That’s going to be important for everyone,” he said.
Bank of Canada senior deputy governor Carolyn Rogers said a strong Fed benefited virtually every economy in the world because it kept markets and inflation stable.
“Those things contribute to predictability and less sort of volatility in rates … there are a lot of reasons for having a strong, independent Fed,” she told the press conference.
(Reporting by David Ljunggren. Editing by Jane Merriman)
Here’s what you need to know about the state of inflation in Canada.
A modest increase in inflation leaves policy-makers focused on the bigger picture
Statistics Canada says the annual rate of inflation came in at 1.9% in August, up from 1.7% in July. The Bank of Canada is responsible for maintaining price stability in Canada and sets a target of 2% for annual inflation.
“I mean, 1.9% is actually pretty good,” said Mostafa Askari, chief economist at the Institute of Fiscal Studies and Democracy and the University of Ottawa. Askari said a brief month-to-month increase in inflation isn’t much to worry about on its own. He said policy-makers should watch trends over six months or longer before reacting to movement in price figures.
Canadians see relief at the pumps and in mortgages, but food prices stay sticky
Randall Bartlett, deputy chief economist at Desjardins, said the big factor easing inflation right now is the termination of the consumer carbon price. `Because the carbon levy was in place for consumers in 2024, the Liberals’ move to end the policy in April has meant lower prices at the gas pumps in recent months, skewing data in the year-over-year comparisons.
Shelter inflation is also diminishing as the pace of population growth slows, easing competition for apartments and reducing rent prices in many cities. Canadians shopping for a new mortgage today are also seeing rates closer to 4% on a five-year fixed loan. Rates were well over 5% this time last year.
One area where consumers are still feeling the pinch is food inflation, which StatCan pegged at 3.4% in August. That rate is still well below the double-digit yearly gains seen during the height of the inflationary period of a few years ago.
Askari said consumers are feeling the cumulative impact of years of inflation pushing prices higher, particularly at the grocery store. Prices tend to rise quickly on the way up but are “sticky” on the way down, if they ease at all, he said.
You’re 2 minutes away from getting the best mortgage rates.
Answer a few quick questions to get a personalized quote, whether you’re buying, renewing or refinancing.
Tariffs and weather shifts keep food prices volatile, but inflation relief is on the horizon
Another force affecting grocery inflation is Canada’s retaliatory tariffs against the United States. Some counter tariffs—which are paid by Canadian firms importing U.S. goods—were imposed on inputs for manufactured products and are baked into the final cost of a good or absorbed into a company’s margins.
Article Continues Below Advertisement
Those costs show up more readily in perishable goods bought at the grocery store, like Florida orange juice. But fresh food prices are also vulnerable to shifts in weather and growing conditions around the world. Askari said this makes it difficult to say with absolute certainty how much price hikes are tied to tariff impacts.
Canada dropped most of its retaliatory tariffs on the United States at the start of the month. Combined with the elimination of the consumer carbon price, Bartlett expects the end of counter tariffs will leave headline inflation a full percentage point lower in 2026 than it would have been with those two policies in place. But he also expects previous impacts from counter tariffs will persist in the inflation readings for September and gradually fade through the rest of the year.
Conservative Leader Pierre Poilievre has accused the federal government of running deficits that fuel inflation. “Deficits drive up inflation, grocery prices, housing costs, and interest rates,” he said in question period on Sept. 17. Experts say the impact of federal spending on inflation is less clear than that.
Askari said that when government spending results in more money in the pockets of Canadians or businesses, it drives up spending demand in the economy. More demand, without an associated boost in supply, can drive up inflation.
When government spending is aimed at increasing supply, however—by expanding the stock of housing, for example—that can take pressure out of inflation, Askari said. “In principle, deficit spending could put pressure on prices. Calling every government spending inflationary is not correct,” he said.
Canada’s economy contracted in the second quarter, and most economists expect a modest recovery to start in the third quarter. Bartlett said this reflects an economy that’s operating below its potential—there’s slack in the economy, in other words—so a bit of fiscal stimulus could “shore up” the economy without triggering a sharp spike in inflation.
There are limits, however. Bartlett said the size of the deficit the federal Liberals have telegraphed is coming in the upcoming fall budget may, in fact, be higher than warranted, given the state of the economy. Ottawa’s planned capital investments could be inflationary in the near-term if they lead to a surge in demand for construction labour and materials, Bartlett said.
But those same spending plans could take steam out of inflation in the future if they help to boost productivity in the economy in the medium or longer term, he added. “The proof in the pudding is going to be in the tasting, in terms of how effective this infrastructure investment is,” Bartlett said.
Governor Tiff Macklem said the risks have shifted since the bank’s last interest rate decision in July. Cracks in the labour market and a sharp drop in exports are threatening growth, he said, while earlier signs of underlying inflation pressure are fading. “With a weaker economy and less upside risk to inflation, governing council judged that a reduction in the policy rate was appropriate to better balance the risks,” he told reporters after the rate decision Wednesday.
The Bank of Canada signalled it will keep looking over a shorter horizon than usual as it tries to set monetary policy in a constantly shifting environment. Macklem said the bank is ready to adjust its policy rate again if warranted. “We’ve demonstrated today, if the risks tilt, if the risks shift, we’re prepared to take action,” he said. “And if the risks tilt further, we are prepared to take more action. But we’re going to take it one meeting at a time.”
Macklem forecasts modest growth despite rising unemployment and shrinking economy
Macklem said some of the stickiness in underlying inflation that was worrying the Bank of Canada earlier this year now appears to be diminishing. The federal government’s decision to drop most retaliatory tariffs against the United States at the start of this month will also take some fuel out of price growth, he said. Counter-tariff impacts were most noticeable in food in recent months, Macklem said, but with the removal of those measures, prices should fall back in affected areas going forward.
Canada’s jobless rate has meanwhile moved up to 7.1% and the economy shrank in the second quarter as U.S. tariffs took full effect. Macklem reiterated that the central bank does not currently have a recession baked into its outlook, calling instead for modest growth of roughly 1% in the second half of the year. “It’s not going to feel good. It is growth, but it’s slow growth,” he said.
You’re 2 minutes away from getting the best mortgage rates.
Answer a few quick questions to get a personalized quote, whether you’re buying, renewing or refinancing.
While the decision to lower the policy rate was widely expected by economists—and came from a consensus of the central bank’s governing council—not all forecasters were in favour of the cut. Nathan Janzen, assistant chief economist at RBC, said Wednesday’s decision was going to be a “close call” but he’s not convinced the economy needed rate-cut stimulus. Consumer spending is holding up and could push inflation higher going forward, he argued.
Meanwhile, economic weakness is still largely concentrated in trade-exposed sectors—an arena for governments to support, not the central bank. “There’s probably a better policy response than changes in interest rates,” Janzen said.
Macklem acknowledged that he believes fiscal policy is better suited to handle the sector-specific impacts of U.S. tariffs, while the Bank of Canada’s interest rate can smooth the broader hit from the ensuing shifts in the economy. “Monetary policy can’t undo the effects of tariffs. The most it can do is try to help the economy adjust at a macro level while keeping inflation well controlled,” he said.
Next rate decision comes ahead of federal fall budget
The Bank of Canada’s next rate decision will come before the federal government’s long-awaited fall budget, which Finance Minister François-Philippe Champagne announced Tuesday would come on Nov. 4.
Article Continues Below Advertisement
Macklem largely dismissed reporter questions Wednesday about whether the lack of fiscal clarity was affecting the Bank of Canada’s decisions. He said government spending plans were just one input into the central bank’s forecasts, and monetary policymakers would adjust their models after the budget is tabled.
Janzen said that while RBC wasn’t calling for a rate cut this month, at 2.5% the policy rate is only slightly below the middle of the central bank’s estimated “neutral range”—where it’s neither boosting nor restricting economic growth. “It’s not aggressively stimulating the economy. It’s still akin to easing your foot off the brakes rather than stepping on the gas from a monetary policy perspective,” he said.
While there are still a lot of unknowns tied to U.S. tariffs and the global trade disruption, Macklem said “near-term uncertainty may have come down a little.” If the tariff situation with the United States remains steady, he said the central bank will likely return to publishing a single, central forecast for the economy at its next monetary policy decision on Oct. 29.
Economists expect more rate cuts, but future moves depend on incoming data
CIBC senior economist Katherine Judge said in a note to clients Wednesday that the economy is “losing resilience” and inflation should remain well contained moving forward. She argued that will set the central bank up for another cut at its October decision.
Financial markets were placing odds of another quarter-point cut next month at just over 40% as of Wednesday afternoon, according to LSEG Data & Analytics.
Janzen said it would be rare for a central bank to either cut or hike its policy rate just once, and RBC is now also expecting additional rate cuts to follow. But he cautioned that the Bank of Canada is still “ultra-focused” on near-term indicators, so incoming data on inflation, the labour market and international trade could sway the central bank back to a hold in the coming weeks. Monetary policymakers will be looking at how export activity evolves and whether costs from the trade disruption are passed on to consumers as it gauges where to take the policy rate next.
Get free MoneySense financial tips, news & advice in your inbox.
The Canadian Press is Canada’s trusted news source and leader in providing real-time stories. We give Canadians an authentic, unbiased source, driven by truth, accuracy and timeliness.
The annual rate of inflation fell to 1.7% in July, Statistics Canada said Tuesday (Aug. 19), down from 1.9% in June. The reading was a tenth of a percentage point below most economists’ expectations.
A 16.1% decline year-over-year in gas prices tied mainly to the removal of the consumer carbon price earlier this year fuelled the drop.
BMO chief economist Doug Porter said in an interview that the July consumer price index was a “relatively favourable report” despite some stubbornness at the grocery store and in housing.
Economists split on how July inflation may affect BoC’s next rate decision
July’s consumer price index marks the first of two looks at inflation that the Bank of Canada will get before its next interest rate decision on Sept. 17. The central bank held its policy rate steady at 2.75% in July.
The Bank of Canada has been looking for signs of how Canada’s tariff dispute is affecting inflation, and is particularly concerned with trends in core inflation that strip out influences from tax changes and other volatile inputs.
Statistics Canada said the Bank of Canada’s preferred measures of core inflation held around 3% in July.
Porter pointed out that another measure of core inflation that strips out influences from food and energy was lower in July, around 2.6%. Looking at those readings, he said the July CPI report “slightly turned the dial” toward a rate cut in September, aligning with BMO’s expectations.
Financial market odds for a quarter-point rate cut in September increased modestly to around 40% as of Tuesday afternoon, according to LSEG Data & Analytics.
Article Continues Below Advertisement
But with core inflation still elevated compared with the headline figure, Porter acknowledged BMO’s call for a cut next month was “a long shot” at this point. “We need some help in the inflation numbers. We probably need a relatively sluggish jobs number as well,” he said.
CIBC senior economist Andrew Grantham said in a note that the lack of easing in core inflation can mostly be attributed to the base-year effect—the distortion from price movements last year on a particular month’s annual inflation comparisons. He said the shorter-term, three-month core inflation readings now show an annualized rate of 2.4% for July.
Grantham said there’s still more data to come before the Bank of Canada’s next rate decision, but the July inflation figures support his call for a quarter-point cut in September.
RBC, meanwhile, is maintaining its call for no more interest rate cuts from the Bank of Canada this year. Claire Fan, senior economist with RBC, said in a note that the monthly advance in core inflation was less than she was expecting. But she said pressure is still spread broadly through the consumer price index.
What contributed to July’s inflation rate?
Inflation on food from the grocery store accelerated to 3.4% annually in July, up from 2.8% in June.
Confectionary prices rose 11.8% and coffee gained 28.6% to be among the biggest contributors to food inflation last month. Statistics Canada said poor growing conditions in countries that produce cocoa and coffee beans were to blame for higher costs.
Prices for fresh grapes were up nearly 30%, driving the overall cost for fresh fruit up 3.9% in July compared with 2.1% in June.
Porter said there are some hints that Canada’s tariff dispute with the United States is a factor keeping food inflation elevated, but he stopped short of blaming it for pain at the grocery store. “I think the bigger story is coffee prices … chocolate prices and beef prices, and those aren’t really a tariff story. Those are more climate issues,” he said.
What is slowing Canada’s economy down? What’s growing?
The manufacturing sector was the largest drag on the economy, followed by utilities, wholesale and trade and transportation and warehousing. The Stats Can report noted shutdowns at Canada’s two largest railways contributed to a decline in transportation and warehousing.
A preliminary estimate for September suggests real gross domestic product grew by 0.3%.
Statistics Canada’s estimate for the third quarter is weaker than the Bank of Canada’s projection of 1.5% annualized growth.
Are there more Bank of Canada rate cuts to come?
The latest economic figures suggest ongoing weakness in the Canadian economy, giving the central bank room to continue cutting interest rates. But the size of that cut is still uncertain, with lots more data to come on inflation and the economy before the Bank of Canada’s next rate decision on Dec. 11.
“We don’t think this will ring any alarm bells for the (Bank of Canada) but it puts more emphasis on their fears around a weakening economy,” TD economist Marc Ercolao wrote.
The central bank has acknowledged repeatedly the economy is weak and that growth needs to pick back up. Last week, the Bank of Canada delivered a half-percentage point interest rate cut in response to inflation returning to its 2% target.
Governor Tiff Macklem wouldn’t say whether the central bank will follow up with another jumbo cut in December and instead said the central bank will take interest rate decisions one a time based on incoming economic data.
The central bank is expecting economic growth to rebound next year as rate cuts filter through the economy.
Changes to the BoC rate impacts the prime rate set by Canadian lenders, which in turn affects the pricing of variable-based borrowing products, which are based on the prime rate plus or minus a percentage. Following this most recent cut, the prime rate at most Canadian lenders will drop to 5.95% from 6.45%. What does that mean to your money and your debt? Keep reading.
The BoC is taking action with this larger-than-usual cut
When the central bank lowers its benchmark rate, it typically does so in quarter-point increments —unless there’s an economic reason for a heftier cut. Half-percentage point decreases like today’s are rare, but they do have a precedent; the last time the BoC doled out cuts of this size was back in March 2020, when it implemented three in rapid succession to support the economy amid the onset of the COVID-19 pandemic. Outside of the COVID era, today’s rate cut is the largest since March 2009.
That the BoC is once again supersizing its cuts points to concerns that the economy is slowing at a faster pace than expected. The most recent inflation report for September from Statistics Canada revealed the year-over-year inflation as measured by the Consumer Price Index (CPI) fell to 1.6%, which is below the BoC’s 2% target. That’s considered sustainable for the Canadian economy. The BoC tweaks its benchmark rate to keep it as close as possible to target. When inflation is running hot, it hikes rates to cool consumer spending and access to credit. The opposite occurs when inflation gets too soft; the BoC must ease borrowing conditions to encourage consumption, and bolster economic growth, otherwise it risks an impending recession. We’re in the latter situation right now.
Will the BoC continue to drop its rate?
Should economic data, such as inflation, GDP, and job market numbers, continue to trend as it has, additional rate cuts are a certainty, including more supersized cuts. Much will hinge on the next CPI report, due out on November 19. Should inflation remain sluggish, that increases the chances of another half-point cut in the BoC’s next rate announcement, on December 11.
The BoC is also keen to lower its rate down to “neutral” state, which is a range between 2.25% to 3.25%. This again is a rate that neither inflames or stunts economic growth, and remaining above it too long poses economic risk.
Following this rate cut today, the overnight lending rate remains 0.50% above the higher end of the neutral range. Overall, analysts think the BoC will lower its rate by another 1.75% by the end of 2025.
What does the BoC rate announcement mean to you?
What does it mean for you, your home, your finances and more? Read on.
The impact on Canadians with a mortgage
Whether you’re shopping for a brand new mortgage rate or renewing your existing term, today’s rate cut will make it slightly more affordable to do so.
The impact on variable-rate mortgages
Variable mortgage rate holders are the most heavily impacted by the October rate cut, as their mortgage payments—or the portion of their payment that services interest—will immediately decrease along with their lenders’ prime rate. These borrowers in Canada also have much to look forward to, with anticipated rate cuts on the horizon.
The half-percentage point interest rate cut marks the fourth consecutive reduction since June and brings the central bank’s policy interest rate down to 3.75 per cent.
With annual price growth now around 2%, governor Tiff Macklem said the Bank of Canada’s job has shifted from lowering inflation to maintaining it around the inflation target.
You’re 2 minutes away from getting the best rates.
Answer a few quick questions to get a personalized quote, whether you’re buying, renewing or refinancing.
“We took a bigger step today because inflation is now back to the two per cent target and we want to keep it close to the target,” Macklem said in his opening statement.
“High inflation and interest rates have been a heavy burden for Canadians. With inflation now back to target and interest rates continuing to come down, families, businesses and communities should feel some relief,” he went on to say.
Canada’s inflation rate fell to 1.6% in September, solidifying forecasters’ expectations for a larger rate cut. Bigger cuts mean the rate can be lowered faster.
“The recent data has allowed the Bank of Canada to more decisively plant the victory flag in its battle to get inflation to its two per cent target on a sustainable basis,” wrote CIBC chief economist Avery Shenfeld in a client note.
The governor said the central bank expects it will lower the interest rate further—so long as the economy evolves in line with its forecast— but he stopped short of saying whether the he expects another half-point cut is likely in December.
“I’m not going to handicap the next move,” Macklem said. “I think we’ve been pretty clear on the direction. And I think we’ve been pretty clear that the timing and the pace is going to depend on how the data evolves.”
17. 2018: Transitioning to more protectionist policies, the United States initiated a renegotiation of the North American Free Trade Agreement (NAFTA)—brought into force in 1994. The Canadian government worried it could significantly affect exports to the country’s largest trading partner. The conflict led to a short-lived but dramatic trade war. Canada, the United States and Mexico ended up negotiating a new trade deal—the United States–Mexico–Canada Agreement (USMCA)—which includes a sunset clause after 16 years.
18. 2019: The federal government was concerned about retirement security, with the decline of workplace pension plans and Canadians’ low savings rate. So, it expanded the Canada Pension Plan (CPP). The public pension plan will grow to replace 33.33% of Canadians’ average work earnings, up from 25%. Over the seven-year roll-out of the program’s enhancement, CPP contributions will also continue to increase.
19. 2020: The COVID-19 pandemic swept through the world, and it had dramatic repercussions on the economy. The federal and provincial governments enacted various degrees of lockdowns across Canada to try to contain the virus’ impact.
Image by Drazen Zigic on Freepik
20. 2020: The government spent hundreds of billions of dollars to pay for benefits that encouraged Canadians to stay home and practice social distancing, most notably, the Canada Emergency Response Benefit (CERB), which was a $2,000 taxable monthly payment. The government also loaned huge sums to businesses to support them through lockdowns that prevented many from operating. The high spending level is one of the factors that led to runaway inflation over the next few years.
21. 2021: Saving rates increased significantly during the pandemic at the same time that the Bank of Canada dropped interest rates to historic lows. Those factors and others led to a boom in Canada’s housing market. Previously, high prices had been mostly limited to major cities, but 2021 saw housing prices rise across the nation, exacerbating long-standing housing affordability issues.
22. 2021: The huge supply of money that entered the economy during the pandemic due to government spending and borrowing, plus supply chain disruptions, led to a dramatic increase in inflation. Houses, cars, groceries and other daily essentials all rose significantly in price.
23. 2022: The Bank of Canada started hiking interest rates rapidly to try to tamp down runaway inflation. Housing prices stabilized (and even fell slightly), but affordability remained an issue as some borrowers’ mortgage payments increased, even doubled. The stock market entered a slump, while prices on everyday goods like gas and groceries remained high, leading to frustration for many Canadians.
24. 2023: The federal government continued to increase its immigration targets to unprecedented levels, letting in millions of international students and low-wage, low-skilled workers under temporary worker programs. The surge in population challenged Canada’s already-tight housing market and strained health-care systems. Wages, which had begun to rise shortly after the pandemic because of labour shortages, started to stabilize. Widespread support for immigration, which had for decades been positive, began to waver.
As inflation sharply accelerated in 2022, household purchasing power declined. Meanwhile, the Bank of Canada rapidly increased its key interest rate from its pandemic-era lows, bringing it up to 5% by mid-2023 before hitting pause.
The Consumer Price Index reached an all-time high of 8.1% in June 2022, and has slowed ever since under the weight of rate hikes by the Bank of Canada.
While higher interest rates weighed on many households as the cost of their mortgage payments rose, it also helped boost investment income, the report said.
The investment income of the wealthiest 20% of households grew faster than their interest payments, leading to a net increase in income over inflation and boosting their purchasing power in 2023.
For other households, interest payment increases on average were higher than their investment income last year.
As a result, households in the third and fourth quintiles saw their purchasing power stagnate, while the lowest-income households saw their power deteriorate.
“In summary, the purchasing power of most households remained higher in the first quarter of 2024 than in the last quarter of 2019,” the report said.
“However, since 2022, rising inflation and tighter monetary policy have eroded purchasing power, particularly among lower-income households.”
In the company’s fall economic outlook released Thursday, it forecasts the central bank’s interest rate will fall to 3.75% by the end of this year and a neutral rate of 2.75% by mid next year.
Meanwhile, it expects the economy to grow moderately as softer labour market conditions persist, especially as many home owners have yet to face higher rates when they refinance their loans.
“We do think that we’re going to be in for a decent year next year,” said Dawn Desjardins, chief economist at Deloitte Canada.
It appears Canada will successfully skirt a recession despite the impact of higher borrowing costs on the economy, said Desjardins.
“It’s hard to argue that the economy is just skating through this period of higher interest rates. But having said that, the overall numbers themselves continue to show the economy is expanding,” she said.
“Yes, the labour market has softened, but I don’t think we’re in any kind of crisis in the labour market at this time.”
Higher interest rates impacting economic growth, labour market
The Bank of Canada has cut its benchmark rate three times so far this year as inflation has eased, and signalled more cuts are coming.
Inflation in Canada hit the central bank’s 2% target in August, falling from 2.5 in July to reach its lowest level since February 2021.
In announcing the rate cut Wednesday, Bank of Canada governor Tiff Macklem said if inflation continues to ease broadly in line with the bank’s July forecast, it is reasonable to expect further cuts in the policy rate.
Julie Leduc, a mortgage broker at Mortgage Brokers Ottawa, said clients with variable-rate loans were not happy when rates were rising, but the cycle is turning.
“We’ve lived the worst of it, we’re on our way out,” she said.
“So let’s look for the benefits and the benefit is, if they go variable and the rates go down, they’re going to live the benefit.”
Right now, the rates offered to those looking for a new variable-rate mortgage or needing to renew are higher than those being offered for five-year fixed rate mortgages, something that Leduc called an anomaly.
That’s because the expectations are that the Bank of Canada will continue to cut interest rates, lowering the amount charged to borrowers in the future. If something unexpected happens and the central bank doesn’t cut rates, then the rates charged on variable-rate mortgages won’t go down.
What to expect if you’re mortgage holder
But if things continue to roll out as expected, those choosing variable-rate loans will see the amount they are charged go down. Just how much and how quickly will depend on the central bank.
Sojonky says the discounts lenders offer to the prime rate for variable-rate mortgages are also improving.
The immediate impact of today’s rate cut will be interest rate relief for Canadians.
As a result of today’s rate cut, most Canadian lenders will now lower their prime rates to 6.45%, from the previous 6.7%. This in turn will cause variable-rate borrowing products, including variable-rate mortgages, to also drop, as their pricing is based on prime plus or minus a percentage. Those with home equity lines of credit (HELOCs) will also see their interest rates decrease.
Will the BoC continue to drop its rate?
Today’s quarter-point cut was widely anticipated. In fact, markets had priced in a 100% chance that it would occur. The deal for the rate cut was sealed after the latest inflation numbers trended in the direction the BoC wants: down between 2% and 3%. The July Consumer Price Index (CPI) report revealed inflation fell to 2.5%.
“As expected, inflation slowed further to 2.5% in July. The Bank’s preferred measures of core inflation averaged around 2.5% and the share of components of the consumer price index growing above 3% is roughly at its historical norm,” wrote the BoC’s Governing Council—the body that makes the central bank’s interest rate decisions—in its announcement.
The BoC also pointed out that shelter inflation—the largest contributor to the CPI—is also starting to slow. This includes mortgage interest costs (MIC), which measures the amount of interest Canadians pay on their mortgages. As a result of the previous two rate cuts, MIC dropped to 21% from 22.3% in July. That’s great news. but it also reflects just how much mortgage costs have soared for Canadians since the start of the pandemic.
In addition to inflation, the BoC also stated that recently revealed second quarter gross domestic product (GDP) numbers indicate the economy slowed in June and July. This suggests further rate cuts are to come; in fact, it’s expected the BoC will dole out two more quarter-point cuts in its October and December announcements this year, bringing the Overnight Lending Rate to 3.75%—its lowest since December 2022.
The prognosis is also looking good for 2025, should economic trends continue as the BoC expects. And we could be in store for another four cuts, totalling 1%, by the end of next year, which would bring the benchmark rate to 2.75%. That would be a low not seen since September of 2022, when the BoC increased its rate from 2.5% straight to 3.75% as part of its aggressive hiking cycle.
What does the BoC rate announcement mean to you?
What does it mean for you, your home, your finances and more? Read on.
… if you’re a Canadian with a mortgage
Renewing or borrowing, this rate cut spells relief for Canadians.
The impact on variable-rate mortgages
Today’s rate cut is music to variable mortgage holders’ ears. Variable interest rates will lower to reflect the cut, and how borrowers will be impacted will depend on the type of variable mortgage they have. Those who hold adjustable-rate variable mortgages will see their monthly payment immediately lower, while those on a fixed payment schedule will see more of their payment going towards their principal mortgage balance.
Bond yields have a “positive correlation” with fixed mortgage rates. That means when bond yields go up, so do fixed-rate mortgages, and vice versa. And since Canadian five-year government bond yields have dropped to 2.9%, as of Tuesday, mortgage rates are expected to come down, too.
What are bonds?
Bonds are a form of debt security. Governments and corporations issue bonds to borrow money from investors. The amount borrowed is referred to as the bond’s face value or par value.
Interest is paid on the face value to reward investors for lending their money. The rate may be fixed—constant over the duration of the bond—or variable, changing over time in response to changes in a benchmark interest rate such as the prime rate.
Bonds are commonly referred to as fixed-income securities regardless of whether their interest rates are fixed or variable.
According to Ratehub.ca (Ratehub Inc. owns both Ratehub.ca and MoneySense), fixed mortgage rates are on their way down.
“Bond markets have dropped in response to yesterday’s massive stock sell-off, and are now at 2.97%, a low not seen since June 2023, and also marking a 20-basis point drop in the span of a week,” says mortgage expert Penelope Graham of Ratehub.ca. “That will certainly prompt additional discounts for fixed mortgage rates, on top of the lower rates we’ve seen hit the market in recent weeks.”
The effect on mortgage rates
Bond yields have been trickling down for a bit now. With the recent Bank of Canada (BoC) interest rate cuts on June 5 and July 24, yields have hovered around 3.3%, which hinted at a drop in fixed mortgage rates. And yesterday’s investor sell-off indicated lack of confidence from investors. So, where do mortgage rates sit?
“Right now, the lowest insured five-year fixed mortgage rate is 4.29%, which is the lowest a five-year term has been since last May,” says Graham. “With further decreases expected, it’s a good idea for mortgage shoppers and renewers to look into their rate hold options, which would guarantee them today’s lows for up to 120 days.”
Check this table to see how mortgage rates are reacting.
powered by
Will things be more affordable? Maybe, for now
As for the market, some investors are relieved to see stock prices drop, namely those of technology companies, including the Magnificent 7, which have had a mixed bag of earnings this quarter. It’s not only made fixed mortgages, but also some sought-after stocks, more affordable.
Despite some signs of cooling, the U.S. economy kept chugging along even with higher rates, outpacing Europe and Asia. Then came last week’s economic reports.
Weak reports on manufacturing and construction were followed by the government’s monthly report on the job market, which showed a significant slowdown in hiring by U.S. employers. Worries that the U.S. Fed may have kept the brakes on the economy too long spread through the markets.
Big Tech movements
A handful of Big Tech stocks drove the market’s double-digit gains into July. But their momentum turned last month on worries investors had taken their prices too high and expectations for their profit gains had grown too difficult to meet—a notion that gained credence when the group’s latest earnings reports were mostly underwhelming.
Apple fell more than 5% Monday, after Warren Buffett’s Berkshire Hathaway disclosed that it had slashed its ownership stake in the iPhone maker. Nvidia lost more than $420 billion in market value Thursday through Monday. Overall, the tech sector of the S&P 500 was the biggest drag on the market Monday.
Japan’s rollercoaster
The Nikkei suffered its worst two-day decline ever, dropping 18.2% on Friday and Monday combined. One catalyst for the outsized move has been an interest rate hike by the Bank of Japan last week.
The BoJ’s rate increase affected what are known as carry trades. That’s when investors borrow money from a country with low interest rates and a relatively weak currency, like Japan, and invest those funds in places that will yield a high return. The higher interest rates, plus a stronger Japanese yen, may have forced investors to sell stocks to repay those loans.
What should investors do now?
The prevailing wisdom is: Hold steady. Experts and analysts encourage taking a long view, especially for investors concerned about retirement savings. “More often than not, panic selling on a red day is generally a great way to lose more money than you save,” said Jacob Channel, senior economist for LendingTree, who reminds investors that markets have recovered from worse sell-offs than the current one.
Bitcoin was back up to $56,490 Monday morning after the price of the world’s largest cryptocurrency fell to just above $54,000 during Monday’s rout. That’s still down from nearly $68,000 one week ago, per data from CoinMarketCap.
This latest decrease brings the central bank’s rate—which sets the benchmark for Canada’s prime rate and variable-rate borrowing products—to 4.5%.
Combined with last month’s decrease, the benchmark cost of borrowing in Canada is now down 0.5% and is at its lowest since May 2023.
What does the rate cut mean? Will the interest rate cuts continue?
In the immediate aftermath of today’s rate cut, Canada’s prime rate will decrease from 6.95% to 6.7%, with consumer lenders passing that discount onto their prime-based products, including variable mortgage rates and home equity lines of credit (HELOCs).
While the outcome of today’s BoC announcement was expected—markets had priced in an 80% chance of a cut—the language in the central bank’s news release was surprisingly cheerful. The central bank usually keeps its cards close to its chest in terms of future cuts, but it wasn’t afraid to come across more dovish today, pointing to the progress made thus far on inflation.
It noted its preferred Consumer Price Index (CPI) “core measures” (called the CPI trim and median) have both trended under 3% in the last few months. The BoC also suggested that inflation will settle around 2%—the target the central bank wants to see—by 2025.
That translates to more cuts to come. The question now, though, is whether another quarter-point cut will come in September and/or December. And, of course, just how many more cuts will come in 2025.
Currently, analysts believe the BoC’s cutting cycle will bottom out at 3%, which would require another six quarter-point cuts.
Of course, the BoC maintains that future cuts will depend heavily on inflation, stating, “Monetary policy decisions will be guided by incoming information and our assessment of their implications for the inflation outlook.” That means the markets will be watching upcoming CPI reports like a hawk.
What does the BoC rate announcement mean to you?
…if you’re a mortgage borrower
Renewing or borrowing, this is good news for Canadian home owners.
The impact on variable-rate mortgages
If you’ve stuck it out this far with a variable mortgage rate, you’re being rewarded today. As a result of today’s rate cut, your mortgage rate and payment will lower in kind immediately, if you’re in an adjustable-rate mortgage. If you’ve got a variable mortgage rate with a fixed payment schedule, more of your payment will now go toward your principal mortgage balance, rather than servicing interest.
For most Canadians, using a broker is the wisest choice to save money, as they have access to a wider selection of products and should have more experience in going through the application process than you do.
However, not all brokers are made the same. Some specialize in mainstream lenders, others are more familiar with getting you a mortgage if you have impaired credit, while others tend to source mortgages for investment properties. Again, ask around, search online. Look at reviews and get referrals if you can.
What to do before signing a mortgage contract
Before signing your mortgage contract it’s worth reading the fine print, to make sure everything’s above board. Are you getting the interest rate you signed up for? What about the cost of any lender fees, like an arrangement or booking fee?
One important aspect is your “prepayment privilege,” which means how much you’re able to overpay your mortgage every month, shortening the time it takes to pay off the loan. It’s good to know where you stand, because by paying too much you can be charged a prepayment penalty, which makes paying it off faster not worth it.
Buyers should view a survey of the property before signing the contract, as this can reveal if there are any issues with the home they’d need to deal with, and could even justify a renegotiation on the price. Surveys reveal the boundary of the home, so you have an idea of where you’re allowed to build on. In Canada most sellers take out the survey, known as real property reports (RPRs), and they should be scrutinized before you sign on the dotted line.
If you’re buying a condominium—often the most affordable option in cities—you’ll want to review documents on how it’s run. Generally you join a condominium corporation where you have to pay fees which are used to manage common areas of the building, so it’s a good idea to know what you’re getting into.
In the contract you should make sure any verbal agreements are in writing. For example if the seller informally agreed to leave some furniture as part of the purchase it’s best to make this official, just in case you get a nasty surprise when you move in.
When getting a mortgage it’s important to make sure you don’t overburden yourself and have a backup plan if something goes wrong. Like, could you afford to repair a major leak if that happened? Do you have a plan of action on how you’ll be able to repay the mortgage if you lost your job? In some cases the latter issue can be mitigated by either taking out insurance, or using a guarantor when applying for a mortgage.
Bank of Canada governor Tiff Macklem has suggested the federal budget presented last month wouldn’t have much of an effect on inflation.
Since last summer, the governing Liberals have been pummelled by Conservatives in public opinion polls over cost-of-living issues.
Rapidly rising grocery prices have been a top concern, in particular.
And while food prices are significantly higher than they were a few years ago, the data shows grocery prices grew at a modest pace in April, rising 1.4% from a year ago.
Meanwhile, higher gasoline prices moderated the deceleration in inflation last month, with pump prices rising 6.1% year-over-year.
Excluding gasoline, prices were up 2.5% from a year ago.
“I think what’s really the most encouraging is that we saw continued softness in some of the core measures that the Bank of Canada is looking at when it’s looking to judge when and how quickly to cut interest rates,” Grantham said in an interview.
The Bank of Canada’s core measures of inflation, which strip out volatile prices, slowed last month and are all now below 3%.
The rate hold was largely anticipated by markets and economists. Many hoped it to be the central bank’s last hold before pivoting to a cutting cycle (lowering the rate, finally). Optimism around this has grown following February’s inflation report, in which the Consumer Price Index (CPI) clocked in at 2.8%, which is within one percentage point of the BoC’s 2% target.
However, the BoC itself seems less enthusiastic about this prospect.
The tone and language used in the announcement by the BoC’s Governing Council (the team of economists setting the direction for Canadian interest rates) clearly stated that inflation risks remain too high for comfort.
Why is the BoC holding its rate?
This is due to steep shelter and mortgage interest costs right now, which are the largest contributor to the CPI. However, the council did note that the core inflation metrics the BoC monitors (referred to as the median and trim) have improved slightly to 3%, with the three-month average moving lower. This is notable, and likely the clearest signal the central bank may be preparing to cut rates—but the BoC needs to see more of this trend before it’ll make a downward move.
Is inflation still too high in Canada?
“Based on the outlook, Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet,” reads the BoC’s announcement. “While inflation is still too high and risks remain, CPI and core inflation have eased further in recent months. The Council will be looking for evidence that this downward momentum is sustained.”
The BoC also updated its inflation forecast, expecting it to remain at 3% during the first half of 2024, fall below 2.5% in the last six months of the year, and finally dip under the 2% target in 2025.
As this marks the BoC’s sixth consecutive hold, there hasn’t been a change to the prime rate since July 2023. That means the cost of borrowing has sat at a two-decade high for the last nine months—and that certainly has implications for all Canadians. Here’s how you may be impacted, whether you’re shopping for a mortgage, saving a nest egg, or making an investment decision.
How the Bank of Canada’s interest rate affects you
What the BoC’s rate hold means if you’re a mortgage borrower
First and foremost: If you’re a variable mortgage holder, you are the most directly impacted by the BoC’s rate direction out of everyone on this list. This is because the pricing for variable products is based on a “prime plus or minus” method. For example, if your variable rate is “prime minus 0.50%,” your variable rate today would be 6.7% (7.2% – 0.50%).
As a result of this most recent rate hold, today’s variable mortgage holders won’t see any change to their current mortgage payments; those with “adjustable” or “floating” rates will see the size of their monthly payments stay the same. Those with variable rates on a fixed payment schedule, meanwhile, won’t see any change to the amount of their payment that goes toward their principal loan. All variable-rate mortgage holders—and those with HELOCs, too—will continue to experience stability, though these Canadians may be frustrated that the BoC continues to be coy around future rate-cut timing.
Meanwhile, Canada’s rise in unemployment comes as high borrowing costs weigh on businesses and strong population growth continues to add to the country’s labour supply. The unemployment rate was up one percentage point compared with a year ago.
“The problem is that we got a slight decline in employment at a time when the population is still increasing, very, very quickly. And that was the main cause of concern within this report,” Grantham later said in an interview.
Canada’s jobless rate and unemployment stats
Statistics Canada says the rise in the jobless rate was driven by an increase of 60,000 people searching for work or temporarily laid off. The total number of unemployed people in the country stood at 1.3 million last month, an increase of nearly 250,000 compared with a year ago.
Young people are particularly feeling the chill in the labour market. Employment among those aged 15 to 24 declined by 28,000 in March and the jobless rate for the group rose to 12.6%, the highest it’s been since September 2016 outside of pandemic years 2020 and 2021. An RBC report released in January said students and new graduates, rather than new arrivals to Canada, are driving the increase in unemployment in the country. (Here are the best jobs in Canada for immigrants.)
“Close to half of the increase in the total number of unemployed people year-over-year in Canada… were students that were not in the job market and have started looking for work,” Janzen said.
Photo by Maria Orlova from Pexels
Friday’s report shows job losses last month were concentrated in accommodation and food services, followed by wholesale and retail trade and professional, and scientific and technical services. Meanwhile, employment increased in four industries, led by healthcare and social assistance.
Despite weaker labour market conditions, wage growth continued to grow rapidly, with average hourly wages rising 5.1% annually.
Although economists are gearing up for rate cuts in the coming months, the job market is expected to remain weak for a while. Janzen expects the unemployment rate to peak at 6.5% in the third quarter of the year, noting interest rates will continue to restrict growth until they return to normal levels.
That’s according to the central bank’s summary of deliberations detailing the discussions governing council members had in the lead-up to the March 6 interest rate announcement.
What did the Bank of Canada’s governing council agree on?
The summary says governing council members agreed that if the economy and inflation evolve in line with the Bank of Canada’s projections, the central bank will be able to begin cutting interest rates sometime this year.
And while members agreed on the conditions the Bank of Canada needs to start lowering its policy rate—they want to see further and sustained easing in the bundle of indicators they call “underlying inflation”—they had varying views on when those conditions will be met.
“There was some diversity of views among governing council members about when there would likely be enough evidence that these conditions were in place, and how to weight the risks to the outlook,” the summary said.
The Bank of Canada opted to continue holding its interest rate at 5% earlier this month and brushed off questions on the timing of rate cuts.
Governor Tiff Macklem said the central bank did not want to move too quickly, only to have to reverse course later.
Recent data shows Canada’s annual inflation rate came in lower than expected for a second consecutive month, reaching 2.8% in February.
When will the Bank of Canada lower its policy rate?
As inflation continues to ease and the economy slows, forecasters continue to expect the Bank of Canada to begin lowering its policy rate around the middle of the year.
