No rate cuts expected until second half of 2024, says BMO
BMO Economics released its updated rate forecast today, reducing the amount of monetary policy easing it expects from the Bank of Canada in 2024.
The new forecast is for a total of 50 basis points (0.50%) of rate cuts in 2024, down from its previous forecast of 75 bps. It expects the BoC to deliver its first quarter-point reduction in the third quarter of the year, followed by a second cut in the fourth quarter.
In its previous forecast, BMO had expected the first rate cut to happen in the second quarter of the year.
“We still judge that current levels will likely mark the cycle peaks, and it remains a close call (i.e., highly data dependent),” wrote BMO’s deputy chief economist Michael Gregory.
“But, irrespective of another rate hike, we’ve reduced next year’s total rate cuts to 50 bps from 75 bps on both sides of the border,” he added. “This reflects the theme of ‘higher for longer’ amid continued economic resiliency (but less so now in Canada) and inflation stubbornness.”
Similar expectations south of the border
Similar ‘higher-for-longer’ rate expectations are growing south of the border as well.
Guidance from last week’s Federal Open Market Committee (FOMC) meeting, in which the members opted to leave the Fed Funds target rate unchanged at a range of 5.25-5.50%, raised expectations that the Federal Reserve will deliver an additional quarter-point rate hike.
That, in turn, also pushed out the timing of any anticipated rate cuts.
And, of course, whatever happens in the U.S. typically has some kind of impact on Canadian markets and monetary policy.
“If the Fed hikes, then it raises the odds of another BoC hike and then layer on the idiosyncratic elements to the Canada story that have at least one more hike in the cards, and very possibly more as I have been arguing for some time now,” noted Scotiabank’s Derek Holt.
The impact on bond yields and fixed rates
With persistently high inflation driving expectations that interest rates will need to remain higher for longer, upward pressure has been applied to bond yields, which in turn lead fixed-rate pricing for mortgages.
“Ten-year Canada yields averaged 3.65% in August with September on track for 3.80%…the highest in more than 15 years,” noted Gregory. “The ‘higher for longer’ theme is also seen in 2-year yields that look to average almost 4.80% this month, the highest in 22 years.”
As we wrote last week, higher-than-expected August inflation data sent bond yields surging to a 15-year high. And as predicted, certain lenders have already increased select rates by as much as 30 basis points, as others are continuing to raise their rates.
Last week, the lowest deep-discount, nationally available high-ratio 5-year fixed rate was 5.24%, according to data from MortgageLogic.news. That’s now increased to 5.49%.
The British Columbia Real Estate Association (BCREA) recently released its latest mortgage rate forecast, in which it expects average 5-year discounted rates to remain near 6% into early 2024, before slowly falling to 5.25% by year end.
Average variable rates, meanwhile, are forecast to remain at a high of 7.20% through the third quarter of 2024.
The Bank of Canada’s rate hikes in June and July “sparked a shift in expectations regarding the timing of future Bank of Canada rate cuts from early next year to perhaps the end of 2024 or even mid-2025, sending long-term interest rates significantly higher,” noted Brendon Ogmundson, chief economist at the British Columbia Real Estate Association (BCREA).
“Yields on 5-year Government of Canada bonds soared in August, surpassing 4% for the first time in 15 years,” he added. “Consequently, fixed mortgage rates have hit annual highs, nearing 6%, the impact of which is compounded by an increasingly punishing stress test.”