While the Bank of Canada is anticipated to trim its key rate once again this Wednesday, experts suggest the central bank’s policy rate could fall to as low as 2.00% over the next 14 months, signalling more relief ahead for borrowers.
Markets believe the central bank is likely to deliver a “supersized” rate cut this week due to cooling inflation and a weakening job market.
If that plays out, both RBC and National Bank, along with Caisse Desjardins, are forecasting another 175 basis points (1.75 percentage points) of rate relief by the end of 2025. This would suggest a prime lending rate of 4.20% at most major lenders, a level not seen since early 2022.
For homeowners with variable-rate mortgages, this could bring much-needed relief in the form of lower interest rates and smaller monthly payments. The same goes for those with home equity lines of credit (HELOCs) and personal lines of credit, which typically track the prime rate.
Not all big-bank forecasts are quite as aggressive. CIBC predicts the Bank of Canada’s policy rate will settle at 2.25% by the end of 2025, while BMO and TD Bank are forecasting a more modest drop to 2.50%.
Scotiabank, on the other hand, expects much less easing from the central bank, projecting the overnight target rate to fall only to 3.00% by the end of 2025.
The latest Big bank rate forecasts
The following are the latest interest rate and bond yield forecasts from the Big 6 banks, with any changes from our previous table in parentheses.
| Current Policy Rate: | Policy Rate: Q4 ’24 | Policy Rate: Q4 ’25 | 5-Year Bond Yield: Q4 ’24 | 5-Year Bond Yield: Q4 ‘25 | |
|---|---|---|---|---|---|
 | 4.25% | 3.75% | 2.50% | 2.90% (+30bps) | 2.55% |
 | 4.25% | 3.50% | 2.25% | NA | NA |
 | 4.25% | 3.25% (-25bps) | 2.00% (-75bps) | 2.65% (+5bps) | 2.05% (-50bps) |
 | 4.25% | 3.25% (-50bps) | 2.00% (100bps) | 2.75% (-15bps) | 2.20% (-80bps) |
 | 4.25% | 3.50% (-25bps) | 3.00% | 3.00% (+10bps) | 3.75% (+20bps) |
 | 4.25% | 3.75% | 2.50% | 3.05% (+15bps) | 2.60% |
Growing concern about “slack” in the economy
While the Bank of Canada has spent the past two years laser-focused on taming runaway inflation, its attention is now shifting towards growing weakness in Canada’s labour market.
As of September, the Consumer Price Index (CPI) inflation rate had slowed to 1.6%—now below the Bank’s target of 2%, which is considered the ideal rate to keep inflation stable. Despite the creation of 47,000 new jobs in September, bringing the unemployment rate down slightly to 6.5%, it’s clear that the labour market has “cooled notably” since the run-up in interest rates.
In a recent report, RBC Economics warned that Canada’s job market now poses a bigger risk to the economy than the wave of mortgages set to renew at higher rates.
While the unemployment rate temporarily dipped last month, RBC and others forecast it will rise to 7% by early 2025, requiring additional rate cuts from the Bank of Canada.
Bank of Canada Governor Tiff Macklem echoed these concerns in an interview last month, noting that as inflation gets closer to the target, “your risk management calculus changes…you become more concerned about the downside risks. And the labour market is pointing to some downside risks.”
Macklem suggested that if economic growth weakens, “it could be appropriate to move faster on interest rates,” stressing, “we don’t want to see more slack” in the economy.
What the experts are saying…
Here’s a look at what some economists are saying ahead of Wednesday’s Bank of Canada rate decision.
On the potential for a 50-bps rate cut:
- Scotiabank: “Inflation in Canada is decelerating a bit more rapidly than expected. While we think the growth outlook and the early response to lower interest rates suggest the Bank of Canada should continue to cut its policy rate in a gradual manner, we believe the decline in inflation will prompt the Bank of Canada to cut its policy rate by 50 bps at the October 23 meeting. Following that, we expect a return to a pattern of 25 bps cuts through the middle of the year, with the policy rate sitting at 3.0% then.” (Source)
- RBC Economics: “Policymakers look increasingly worried that the current high level of interest rates is causing more economic pain (higher unemployment and lower per-capita GDP) than is necessary…Interest rate changes impact the economy with a substantial lag, increasing the urgency to get rates back down to a more neutral policy quickly, which is somewhere in the 2.25% to 3.25% range, according to BoC’s estimates.”
- CD Howe Institute: The Institute’s Monetary Policy Council members “think that the Canadian economy is operating well below its productive capacity and that the disinflationary output gap prefigures more undershooting of the inflation target – which might mean that the Bank of Canada will eventually have to target an overnight rate below its longer-term neutral value to stimulate demand and get inflation back to 2 percent.” (Source)
- BMO: “Weaker growth and inflation have set the table for a 50-bps rate cut from the Bank of Canada…however, that won’t necessarily be the pace going forward, especially once policy rates get closer to neutral.”
- Desjardins: “..we remain of the view that the Bank will cut the policy rate by 50 basis points in October. This should be followed another 25bps in December, and likely six more in 2025. But if the labour market starts exhibiting greater weakness going forward, the question will not be if the Bank continues to cut rates but if the pace of rate cuts will need to accelerate relative to our and market expectations.”
On the potential for two back-to-back “jumbo” rate cuts:
- Oxford Economics: “With economic momentum fading, the labour market softening, and inflation falling below the 2% target in September, we now think the Bank of Canada (BoC) will front-load policy normalization with 50bp rate cuts in October and December…We then expect four consecutive 25bp cuts to lower the target for the overnight rate to 2.25% by June 2025.”
- National Bank: “While a 50-basis-point rate reduction is now widely anticipated, OIS markets (and economists) are split on how the BoC will proceed in December. When it comes to forward rate guidance, don’t expect the Bank to explicitly state another 50 basis point cut is in the pipeline. Data dependence will remain the name of the game.”
An informal CMT poll on LinkedIn shows that nearly three-quarters of readers believe the Bank of Canada will deliver a 50-bps rate cut on Wednesday:
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Last modified: February 4, 2025
