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Bank of Canada interest rate forecast report
Majority of experts believe a BoC rate hold is prudent in June with more than a third anticipating a recession in 2023.
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Finder: Bank of Canada Interest Rate Forecast Report
The Bank of Canada (BoC) sets the official overnight rate — the benchmark target rate used by banks, credit unions and lenders to establish interest rates. This benchmark rate greatly impacts savings accounts, mortgages, interest rates charged on personal and car loans and other forms of debt, including credit cards and payday loans.
On July 12, 2023, the BoC held the target benchmark interest rate at:
5.00%
The next BoC interest rate decision is on:
September 6, 2023
Of the experts survey in the Finder: Bank of Canada Interest Rate Forecast for September:
93% predicted a rate hold
Latest BoC benchmark interest rate analysis from the experts
Finder regularly polls economists, analysts, professors and industry experts to forecast the Bank of Canada’s next interest rate decision. Here are the most recent overnight rate predictions.
“A contracted real GDP in the second quarter and [recent] jobless numbers reflect the slowing down of the economy. The decline in housing investment and the heterogeneous impact on homeowners due to high interest rates are likely to lead the Bank of Canada to put a hold on a further increase in the target overnight (interest) rate, for now. However, downward sticky inflation could still worry the Bank in reaching their target level of inflation.”
“[Bank of Canada is expected to hold rates] because data in Q2 was weak and the jobless numbers are rising.”
+0.25%
Hold
Philip Cross, Senior FellowRead Philip Cross’ insight
“[Bank of Canada is expected to hold rates as there’s been] no signal of a hike, this soon.”
+0.25%
Hold
Will Dunning, PresidentRead Will Dunning’s insight
“The BoC is married to a defective model. The recent inflation in Canada was largely driven by supply constraints. Their attempt to reduce inflation by impairing the demand side is unnecessarily hurting Canadians. In fact, in the short- and medium-term, these interest rates are adding to inflationary pressures.”
Hold
Hold
Carl Gomez, Chief Economist and Head of Market AnalyticsRead Carl Gomez’s insight
“It will be a close call, but this is likely because incoming data has softened considerably while the Bank of Canada implicitly signalled in its July communique that policy rates were now ‘sufficiently restrictive’.”
+0.25%
Hold
Nikola Gradojevic, Professor of FinanceRead Nikola Gradojevic’s insight
“Canada’s inflation rate broke the declining trend line and surprisingly ticked up to 3.30% in July 2023, mainly due to holiday travels, higher mortgage cost and electricity prices. Given the recent aggressive interest rate hikes which may now appear ineffective, this is a troubling development that shows a significant underlying risk in the economy. We should also keep in mind that the war in Ukraine is still keeping prices elevated globally. High interest rates and carbon taxes are bringing more financial burden on consumers and, consequently, in August, the Index of Consumer Confidence in Canada fell sharply to the lowest levels in the past two years. Over the one-year period, from July 2022 to July 2023, the total number of insolvencies in Canada was 22% higher. Consumer insolvencies went up by 21.2%, while business insolvencies showed a large increase of 49.1%. This may all lead the Bank of Canada to keep the momentum going and increase the policy rate by 0.25% in September. Another hike may happen despite the latest news from the Statistics Canada that the economy contracted at an annualized rate of 0.2% in the second quarter.”
Hold
+0.25%
Derek Holt, Head of Capital Markets EconomicsRead Derek Holt’s insight
“They will wish to go through a comprehensive forecast exercise into the October Monetary Policy Report (MPR) decision that evaluates how much of today’s GDP softness is transitory versus indicative of momentum concerns.”
—
Hold
Moshe Lander, Senior Lecturer in EconomicsRead Moshe Lander’s insight
“July’s inflation rate came in higher than expected, but core inflation was only modestly higher and there are signs that the economy is finally starting to cool. Plus, [the BoC] will have an additional set of job and unemployment figures, as well as August inflation data to better gauge where the economy is, so the Bank of Canada can hold rates at the September meeting and wait for the October meeting to raise interest rates, if necessary.”
“Financial conditions are restrictive enough, as shown by the downtrend in consumer spending, per capita. Also, this summer brought evidence of rebalancing of labour market conditions. Unemployment [rates] rose, while job postings fell.”
+0.25%
Hold
Angelo Melino, Professor of EconomicsRead Angelo Melino’s insight
“[The BoC won’t change the overnight rate, as] the costs and benefits are closely balanced. [While,] inflation remains stubborn, the economy is slowing and the Bank will probably wait until October when it has a better idea of the impact [of past rate changes how] more slack in the labour market [will have] on inflation.”
+0.25%
Hold
Lars Osberg, Professor of EconomicsRead Lars Osberg’s insight
“A wait and see [approach by the BoC] is reasonable since the last [consumer price index] CPI numbers were ambiguous.”
+0.25%
Hold
Douglas Porter, Chief EconomistRead Douglas Porter’s insight
“The back-up in the unemployment rate and the weak Q2 GDP are plenty of evidence that past rate hikes are biting.”
—
Hold
Benjamin Reitzes, Canadian Rates & Macro StrategistRead Benjamin Reitzes’ insight
“Slowing growth provides confidence [that] inflation will continue to trend toward the 2% target.”
+0.25%
Hold
Avery Shenfeld, Managing Director and Chief EconomistRead Avery Shenfeld’s insight
“There are enough signs that growth is slowing and labour market slack is increasing, [and this] suggests that current interest rates are high enough to bring inflation down, over time.”
+0.25%
Hold
Charles St-Arnaud, Chief EconomistRead Charles St-Arnaud’s insight
“While some indicators could support higher rates (like the increase in inflation, persistence in inflation, and high wage growth) growth is slowing to a crawl and some slack is gradually appearing in the labour market.”
+0.25%
Hold
What is the Bank of Canada’s official policy interest rate?
The BoC does not set monetary policy; however, Canada’s central bank does work with the federal government to establish monetary policy and the primary tool used by the BoC is to make changes to the overnight target rate. By adjusting the target for the overnight rate, the BoC influences short-term interest rates — with an almost immediate impact on all variable-rate credit instruments, including lines of credit, personal loans, credit cards, mortgage rates and interest earned on savings accounts.
The BoC has the option to adjust the overnight rate at any one of their eight fixed-date interest rate announcements.
How the official BoC benchmark affects interest rates
While, a change in the BoC’s target rate does not impact consumers directly, it does trigger a change in the interest rate that banks and other institutions use for loans, mortgages and other forms of credit. A change in rates can also impact savers, as interest rates on savings accounts and GICs also fluctuate with the overnight rate.
Still, for the average Canadian, the BoC target rate can be a useful tool. When the BoC moves to lower the target rate, it’s a signal that they want to help stimulate the economy. The theory is that by making it cheaper to borrow money, there’s a boost in borrowing and spending. An increase in the overnight rate makes borrowing money more expensive, but helps savers earn more.
The Bank of Canada adjusts the target rate in response to various economic conditions, including data regarding: inflation, unemployment rates and global economic factors.
How does the BoC interest rate decision affect your finances?
The BoC can take three actions during an interest rate announcement: Raise, lower or hold the target rate.
The Bank of Canada adjusts the target rate in response to various economic conditions, including data regarding: inflation, unemployment rates and global economic factors.
Raise interest rates
When the BoC raises the overnight rate, almost all lenders will pass on this rate hike to borrowers. This increase will impact all variable-rate loans, including mortgages, lines of credit, payday or short-term loans and interest earned on savings accounts.For instance, if the BoC raises the overnight rate by 25 basis points, then most borrowers will see a 25 basis point increase in their variable-rate mortgage. However, homeowners with a fixed-rate mortgage will not be impacted by this rate change, as the rate is locked-in for the duration of the mortgage contract (known as the term).
For savers, a rate increase can also prompt an increase in interest rates offered on savings accounts, high-interest savings accounts, as well as GICs.
Typically, banks and other institutions will pass on rate increases to credit faster than rate increases to savings products.
Drop interest rates
When the BoC lowers the overnight rate, most lenders will pass on some or all of this rate cut to borrowers. Like a rate increase, a rate cut will impact variable-rate loans, including mortgages.
A rate cut will also prompt a reduction in the interest earned on savings accounts and GICs.
Hold interest rates
When the BoC decides to hold the overnight rate it means no change to interest rates.
Typically, this is done when the BoC is waiting to see how economic factors are unfolding both within Canada and around the world. Another reason is that the BoC is on target — which means the current inflation rate is between 1% and 3%.
Example: How a rate hike or cut can change your variable-rate loan repayments
If the loan you negotiated with your lender charges a variable interest rate, then the payments you make can fluctuate when the Bank of Canada changes the overnight rate.
For instance, if you negotiated a five-year car loan of $25,000 in August 2023, with a variable rate of prime plus 1.50%, then your monthly repayments would be just over $511. (The bank prime rate is 7.2%, as of September 1, 2023, making the interest charged on this loan 8.7%).
⬆️ If the overnight rate rises by 25 basis points your car loan interest rate would increase to 8.95% and increase your monthly car loan repayment to just over $514 — an extra $2.80 per month or $33.60 per year.
⬇️ If the overnight rate decreases by 25 basis points your interest rate would fall to 8.45% and monthly repayments could fall to under $508 — a reduction of $2.80 per month or $33.60 per year.
You can find variable interest rates on mortgages, credit cards, personal loans, car loans, business loans, derivatives and corporate bonds.
Example: How a rate hike or cut can change your variable-rate mortgage payments
As a homeowner, you negotiated a 5.5% variable-rate on a $450,000 mortgage for a 5-year term (based on an amortization of 25 years).
Based on your initial home loan contract your mortgage payment is just under $2,765 each month.
⬆️ If the overnight rate rises by 25 basis points your interest rate would increase to 5.75%. Your monthly mortgage payment would increase to just over $2,830 — an extra $65 per month or $780 a year.
⬇️ If the overnight rate decreases by 25 basis points your interest rate would fall to 5.25%. Your monthly mortgage payment would decrease to approximately $2,695 — a reduction of $70 per month, for a savings of approximately $840 a year.
How the BoC overnight rate has changed over time?
Between 1990 to 2023, the average interest rate in Canada was 5.78%. Since 1990, the highest overnight rate was in February 1991, when it hit 16.00%. In the same time-frame, the lowest overnight rate was in April 2009, when it fell to 0.25%.
In July 2023, the Bank of Canada raised the target for its overnight rate by 25 basis points (bps), after the Bank had already raised the overnight rate 25 bps in the previous meeting (in June 2023).
When it comes to monetary policy and the use of the overnight rate, the Bank’s overall goal is to curb inflation. The aim is to return to a target that’s between 1% and 3%.
According to econometric models, Canada’s overnight interest rate is projected to hover around 3.50% in 2024 and 3.00% by 2025.
More questions about the Bank of Canada's interest rate
Interest rates fluctuate all the time. The interest rate dictates how much it costs to borrow money. Like most services, this cost of borrowing will change based on the market. However, market forces also dictate whether or not interest rates will rise or fall. For instance, if analysts are uncertain about near or long-term economic forces, this can prompt lenders to be more careful about lending and this can increase interest rates. That said, there are a variety of market forces that can influence interest rates, such as economic growth, international trade and inflationary pressures.
Analysts and experts at the Bank of Canada (BoC) will monitor, assess and run predictive models to determine whether or not to influence Canada's monetary policy using the Bank's target rate (aka: overnight rate). The BoC uses the target rate to influence what lenders charge on variable-rate loans, such as variable-rate mortgages, lines of credit, as well as interest earned on savings accounts. When the BoC wants to stimulate the economy, they will lower the overnight rate, which prompts a drop in interest rates. If the BoC wants to help cool the economy, there is a hike in the target rate and this prompts an increase in variable interest rates.
The Bank of Canada is the country's central bank. The BoC's main role is to monitor and promote the economic and financial welfare of the country, as defined by the Bank of Canada Act.
The BoC has five main areas of responsibility:
Monetary policy: The Bank will use monetary policy to influence the supply of money circulating in the economy with the aim to keep inflation low and economic growth stable.
Financial system: The BoC will take actions to promote safe, sound and efficient financial systems, within Canada and internationally. In this way, the BoC will conduct transactions in financial markets in support of these objectives.
Currency: The BoC designs, issues and distributes Canada's bank notes.
Funds management: The Bank of Canada is the "fiscal agent" for the Government of Canada, managing its public debt programs and foreign exchange reserves.
Setting the official overnight rate is one of the Bank's key monetary policy tools. The Bank will announce potential rate changes during one of eight annual, pre-scheduled rate announcements. Based on current economic data and BoC analysis, the Bank will either cut, raise or hold the overnight interest rate.
The Bank of Canada sets eight scheduled dates, each year, where it announces the setting for the overnight rate target. The announcement is followed by a press release explaining the factors behind the decision.
Survey methodology
The Finder: Bank of Canada Interest Rate Forecast report surveyed 15 Canadian economists and industry experts between August 30 and September 1, 2023. Respondents were asked about the upcoming Bank of Canada interest rate forecast announcement scheduled for September 6, 2023.
The online survey allows panellists to answer or skip questions. As a result, the number of responses received may vary by question.
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