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Bank of Canada interest rate forecast report

Experts are unanimous: BoC will hold the policy rate at 5.00% at the October rate announcement.

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 October 25, 2023, the BoC held the target benchmark interest rate at:

5.00%

The next BoC interest rate decision is on:

Dec 6, 2023

Of the experts surveyed in the Finder: Bank of Canada Interest Rate Forecast for the December Policy Rate announcement:

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 from Finder’s economic expert panel:

Murshed Chowdhury, Associate Professor

October
HOLD
December
HOLD
“Despite experiencing inflation above the target, the decreasing real GDP numbers and rising unemployment rates suggest maintaining the policy rate unchanged. The risk factors associated with escalating violence in the Middle East and the economic impacts of other geopolitical factors may need to be realized before changing the policy interest rate.”

Philip Cross, Senior Fellow

October
HOLD
December
HOLD
“It is too close to Christmas for any change.”

Will Dunning, President

October
HOLD
December
HOLD
“Events are increasingly confirming that the recent inflation has been transitory (caused by supply-side events), and therefore it is not affected by interest rates (except to the extent that increased interest costs have added to inflation). The Bank of Canada's policy rate should have been increased to the neutral level during 2021 (2.5%, rather than the current excessive rate of 5.0%), and it should currently be at the neutral rate.”

Carl Gomez, Chief Economist and Head of Market Analytics

October
HOLD
December
HOLD
“The risks on inflation have significantly ebbed in recent months. Moreover, the economy is showing signs of weakness, brought on, in part, by the lagged impact of previous hikes. There is simply no reason for higher interest rates at this point. If anything, it increasingly looks like the Canadian economy will need interest rate cuts.”

Nikola Gradojevic, Professor of Finance

October
HOLD
December
HOLD
“Inflation appears to be slowing down — dropping from 3.8% in September to 3.1% in October. However, grocery prices are still elevated with a 5.4% increase in October (and 5.8% in September). This was followed by a rise in consumer confidence, although this is still below the neutral level. The economy has been weakening in Q3 and Q4 with GDP growth and domestic demand cooling down. Consumer and business insolvencies are still rampant. All this likely suggests another "hold and wait" decision by the Bank of Canada.”

Sal Guatieri, Senior Economist and Director

October
N/A
December
HOLD
“The Bank of Canada did not change rates at the October meeting.”

Atif Kubursi, President

October
HOLD
December
- 0.25%
“The economy is softening and the Bank of Canada should focus on making sure the economy does not fall intio a recession — a recession that will feed economic fears and increase the difficulty of an economic turn around.”

Moshe Lander, Senior Lecturer in Economics

October
HOLD
December
HOLD
“The economy is definitely showing signs of cooling down and inflation has fallen to the outer edge of the Bank's target of 1% to 3%. There is no reason to increase interest rates in light of this news, but inflation has yet to re-anchor in the target range, so there is no ability to decrease interest rates until this happens. The only remaining option is to hold rates where they are and wait.”

Sebastien Lavoie, Chief Economist

October
HOLD
December
HOLD
“The Canadian economy is at the point of stagnation point with quasi-full employment [rates]. The behaviour of companies, consumers and workers is not completely back to normal, but progress has been made sufficiently to bring CPI inflation closer to a comfortable zone. The elevated policy rate level works, and, for now, it is preferable to keep it that way rather than bring an overdose of tightness.”

Angelo Melino, Professor of Economics

October
HOLD
December
HOLD
“There has not been enough new information to change their outlook since the October policy rate meeting.”

Lars Osberg, Professor of Economics

October
HOLD
December
HOLD
“[There have been] mixed messages from the data but [there's been enough bad news to stop further increases [from the Bank of Canada].”

Benjamin Reitzes, Canadian Rates & Macro Strategist

October
HOLD
December
HOLD
N/A

Avery Shenfeld, Managing Director and Chief Economist

October
HOLD
December
HOLD
“Inflation is still too high, but the economy is slow enough to preclude an additional rate hike.”

Charles St-Arnaud, Chief Economist

October
N/A
December
HOLD
"Inflationary pressures have eased and should continue to ease in the coming months."


What is the Bank of Canada’s official policy interest rate?

The BoC does not set monetary policy; however, Canada’s central bank works 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 can adjust the overnight rate at any of its 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 useful. When the BoC moves to lower the target rate, it signals that it wants 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

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, and GICs.

Typically, banks and other institutions will pass on rate increases to credit faster than rate increases to savings products.

Down

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 reduce the interest earned on savings accounts and GICs.

Down

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 your payments 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 monthly mortgage payment is just under $2,765.

⬆️ 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 and 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 by 25 bps in the previous meeting held in June 2023. In the following two policy rate announcements, the BoC held its target rate — keeping the overnight rate at 5.00% during the September and October 2023 interest rate policy announcements.

Regarding 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 will hover around 3.50% in 2024 and 3.00% by 2025.


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