Where are mortgage rates forecast to go in 2025?
If no tariffs had materialized — I expected a BoC resting rate of 2.5% by the end of 2025.
After March's cut, the BoC's policy rate still isn't low enough to encourage a consistent hum of economic growth during what would have been more 'normal' times.
Both inflation and Canada's economic engine were heating up towards the end of 2024, and a policy rate of 2.50% may have been stimulus enough to spur recovery after 2 years of high interest rates while keeping inflation in check.
That would have meant a total prime rate drop of 2.5% (from the high of 7.20% in 2024) by the end of 2025.
I think it's important to keep this forecast here for a time, offering a contrast with what is happening now at the behest of U.S. imposed trade turmoil.
If blanket or partial tariffs are indeed the new normal? Look for the BoC to cut deeper.
Whether it's the threat of U.S. tariffs, a full-blown trade war, or higher tariffs on certain Canadian and U.S. (and Chinese) goods, the impact on our economy is already evident, with small businesses the first to suffer the most.
With an eye on potential price volatility, some economists predict the BoC might have to cut its rate another 3 to 6 times (0.25% drops) to a policy rate of at least 2.25% (and maybe as far down as 1.5%) — for a prime rate of least 4.45%, assuming the current spread with the policy rate of +2.20%.
A tariff-induced recession would see the cuts coming faster and deeper.
However, the central bank may need to consider rate pauses with inflationary headwinds blowing through its hair, especially if it needs to reassert its inflationary-fighting position to remind markets (and Canadians) of that priority.
Note that bond yields, which inform fixed rates, will be pushed and pulled by a mix of forces. However, if more than two interest rate cuts are anticipated, look for a dedicated downward trend.
Everything is uncertain right now. Stay with us as we seek some level of certainty about how this new reality will progress for Canadians.
Read here for more on why trade tariffs could affect mortgage rates this year, including how tariffs have worked out for everyone in the past.
What is the neutral rate?
The BoC had indicated that its neutral rate (assuming no tariffs) currently sits at around 2.75%, where the economy is neither stimulated nor repressed. However, rates might need to go lower to stimulate an economy dragged down by trade turmoil.
Is there a danger that the prime rate could increase?
There's always that danger, although the economic (and tariff threat) softening already underway makes it unlikely — unless the central bank decides to fight inflation, no matter the cause. The crystal ball is in the air regarding how this year's economy will fare.
What about fixed mortgage rates?
As interest rates change, fixed mortgage rates usually move in anticipation of the changes, but more fluctuation is possible between interest rate announcements. That's because fixed rates follow the bond market. Read more here.