Are Interest Rates Finally Set to Drop? What Experts Are Saying

The Bank of Canada is keeping everybody guessing with its next scheduled interest-rate announcement looming, and top economists have differing opinions.

By Josh Sherman | 3 minute read

Nobody has a crystal ball when it comes to where interest rates are headed, but economists provide important context for whatever the Bank of Canada decides next.

Ahead of the Bank of Canada’s highly anticipated policy announcement on June 5, experts at some of the country’s biggest banks are split on whether or not we’ll see a cut to the mortgage-influencing overnight rate. 

The toss-up is partly rooted in the latest inflation data from Statistics Canada. After years of post-pandemic exuberance, inflation finally sunk within the central bank’s target range of 1 to 3% — but barely, at 2.9%. 

“We believe that the door is open for a BoC rate cut, and we have been leaning to [a] June move for the past six months. But it remains a close call,” writes BMO Chief Economist Douglas Porter in a recent report.

The BoC uses its overnight rate, or key policy rate, to keep inflation running at a healthy clip: fast enough that there’s economic growth, but not so fast that prices run away. Rate hikes are used to trim too-high inflation by discouraging demand for goods and services and encouraging saving. Cuts, on the other hand, can spur economic activity by making borrowing money and spending more attractive. (For a more detailed explanation, read Wahi’s explainer on what you need to know about the Bank of Canada’s overnight rate.)

While higher rates have been a tough pill to swallow for many mortgage borrowers, the general consensus is that the medicine is working — and markets are beginning to respond.

More Market-Watchers Expect a Cut 

Bay Street traders have already priced in a rate cut, with markets considering better-than-50-50 odds of a June cut. The average Canadian is less convinced. Only 31% anticipate the central bank will start slashing rates in June, according to a survey by Dye & Durham from its Canadian Pulse Report Q2 2024. “[A] larger proportion say they are skeptical of rate cuts beginning so soon,” the report reads. Some 41% of survey respondents say the BoC won’t reduce rates, while 28% were unsure.

In a separate report, TD Senior Economist Leslie Preston won’t call a June rate cut sure thing either: “[Inflation] is still close to the top of the BoC’s range, and we expect the bank will want to see a bit more confirmation before taking rates lower and lean towards a July cut.”

Economists at RBC are more bearish. On top of the pace of inflation slowing, they cite rising unemployment and downward pressure on wages as other arguments for a cut. “[T]he economic backdrop in Canada has continued to soften,” write RBC Economists Nathan Janzen and Abbey Xu in an article. 

Whatever the BoC’s decision on the first Wednesday of June, TD’s Preston suggests it won’t be long before policymakers pull the trigger. “But June or July, Canadians can be increasingly confident that alongside lower inflation, interest rates are headed lower soon,” she writes.

Although a cut may be on the horizon sooner rather than later, Bryan Yu, chief economist at Central 1, tells Wahi that Canadians shouldn’t expect a return to the historically low rates seen during the pandemic.

“We do think currently that June is probably the first cut, the question is how quickly afterwards we’ll see that rate reduction occur and how deep,” Yu tells Wahi, suggesting rates will sink to 4% by the end of this year and sit at 2.75% at 2025’s conclusion. “It’ll be a relatively modest reduction cycle.

Homeowners Are Feeling the Pinch

For some, a rate cut — any cut — can’t come soon enough.

A growing number of Canadians are falling behind on their mortgage payments, finds a new report from the Canada Mortgage and Housing Corporation. “Under current interest rate conditions, more mortgage holders find themselves in precarious financial situations; the financial buffer they were able to build up during the pandemic has been exhausted,” says the report.

Meanwhile, 14% of Canadians surveyed say they’ve put off buying a home until interest rates drop. “Regardless of the bank’s decision in June, most Canadians believe lower interest rates will positively impact their finances, and many are poised to begin making significant expenditures once rates start to fall,” the Dye & Durham report states.