Experts predict Bank of Canada to drop interest rates by 25-points next week

There may be good news coming for those with variable mortgages and those looking to buy a home. 

Some experts believe the Bank of Canada (BoC) will be dropping interest rates by 25-points at their announcement scheduled for Wednesday, September 17th.

In March, the BoC dropped the overnight interest rate to 2.75%, which was then held at that rate during the August announcement. 

For those unfamiliar, the overnight interest rate is the target rate at which major financial institutions borrow and lend funds to each other for one-day loans.

This influences the overall cost of borrowing in the Canadian economy, including interest rates on mortgages, loans and savings accounts. 

This interest rate has a tangible impact on the rate of inflation by encouraging or discouraging economic growth through consumers’ borrowing and spending. 

According to Ratehub Mortgage expert Penalope Graham, the BoC would be smart to lower the current overnight interest rate in order to help consumers through the ongoing US-Canada trade war. 

“A combination of weaker jobs data both north and south of the border has provided the Bank a compelling reason to deliver a 25-point cut next week,” said Graham.  

“Evidence is mounting that tariffs are whittling economic strength, and that some stimulus will be needed in the short term. The growing likelihood of a similar cut from the US Federal Reserve also provides the BoC breathing room to lower rates without pressuring the Loonie.”

The BoC still has a week to consider their options to lower, stay or raise the interest rate, but their decision must be made in less than a week as it is due the day before the next announcement. 

“The door is certainly open to at least one more cut in 2025, should the economic data show further signs of weakness,” she continued. 

“However, given core inflation metrics remain elevated, the Bank won’t be keen to pass along too much stimulus too soon.”

On mortgage rates and housing, Graham says growing economic pressure in the United States has impacted Canada as well. 

The Canadian government five-year bond yield is in the 2.7% range for the first time since May which has put downward pressure on fixed rate mortgages. 

According to RateHub, five-year fixed-rate mortgages are now below the 4% threshold. 

“With the rate cut narrative returning, borrowers may be wondering if they should wait for rates to lower further before choosing a mortgage product,” said Graham.  

“However, borrowers shouldn’t delay to take out a rate hold or pre-approval, to preserve their rate options; while variable rates may trend lower, lenders could reduce their spreads to the Prime rate in the coming weeks, which would reduce savings.”

She added that it’s possible both fixed and variable rates will see decreases in the coming weeks. 

Graham says that for those deciding between a fixed or variable mortgage, their decision ultimately comes down to risk tolerance.  

“Variable rates may offer greater savings this year, but there are still economic headwinds that could push inflation higher, which would prompt the BoC to reverse course.”

Currently, house prices are remaining stagnant in BC and across Canada, but home buyers are enjoying some of the best affordability when it comes to mortgage rates in recent years. 

This affordability would only be increased if the BoC decides to cut their interest rate next week. 

According to Ratehub, a home buyer who put a 10% down payment on a $943,031 home with a 5-year variable rate of 3.95% amortized over 25 years would have a monthly mortgage payment of $4,579 per month.

This could be lowered if the BoC does announce a 25-basis point rate cut, as the home buyer’s variable mortgage rate will decrease to 3.70% and their monthly payment will decrease to $4,462.

The homeowner would pay $117 less per month or $1,404 less per year if this prediction comes to be.