Bank of Canada Kicks Off 2025 with a Rate Cut and Balance Sheet Normalization
Marci Deane • January 30, 2025
The Bank of Canada has lowered its overnight rate by 25 basis points—the sixth cut since June last year. It also plans to end quantitative tightening and normalize its balance sheet.
This brings the BOC rate to 3.00% and we expect lenders to cut their Prime Lending rate to 5.20%. This is all good news and will help variable rate mortgage holders.
However, the Bank warns of "more-than-usual uncertainty," especially with potential U.S. trade tariffs on the horizon. To say that predictions about future rate trajectory are tricky is quite the understatement at this point. Below is a summary of all the factors impacting the Canadian Economy, the Bank of Canada and interest rates right now.
Canadian Economy & Housing
- Lower rates are boosting the economy, with consumer spending and housing activity picking up.
- Business investment remains weak.
- Exports should benefit from new oil and gas capacity.
Inflation Outlook
- CPI inflation is near 2%, though temporarily affected by the GST/HST suspension on some goods.
- Housing costs are still high but gradually easing.
- Broad indicators suggest underlying inflation is very close to the 2% target.
- The Bank expects inflation to remain near 2% over the next two years.
Labour Market
- Unemployment sits at 6.7%, signaling a soft labour market.
- Job growth has picked up after lagging behind workforce expansion.
- Wage pressures are easing, but progress has been slow.
Global Economy, Bond Yields & Canadian Dollar
- Global GDP is expected to grow 3% annually over the next two years.
- U.S. growth is stronger than expected, while Europe lags.
- China’s economy is stabilizing after recent policy support.
- U.S. bond yields have risen, but Canadian yields are down slightly.
- The Canadian dollar has weakened against the U.S. dollar due to trade uncertainty.
- Oil prices have been volatile, recently settling about $5 higher than October projections.
Other Key Announcements
- The Bank will complete balance sheet normalization and resume asset purchases in March 2025.
- With inflation near 2% and the economy in excess supply, the Bank deemed a rate cut necessary.
- The impact of rate cuts since June has been "substantial," fueling household spending and gradual economic strengthening.
Outlook from the BOC today:
- The Bank projects 1.8% GDP growth for both 2025 and 2026.
- Lower immigration targets will slow population growth, moderating overall economic expansion.
- The risks in the outlook are "reasonably balanced" unless U.S. trade tensions escalate, which could weaken GDP and push prices higher.
- The Bank reaffirmed its commitment to price stability.
Bottom line: The Bank is cutting rates to support growth, but uncertainties—especially trade risks—loom large. So, what to do? Variable rate or Fixed rate? The jury is out on this for the moment but less risk averse borrowers may want to consider a Variable if they believe recessionary pressures will push rates down. The counter argument to this is that Tariffs could cause inflation and thus, push the BOC to increase rates.
Given this chance, risk averse borrowers might therefore prefer to “set it and forget it” with a fixed rate. It comes down to a very personal decision and analyzing the financial position and future goals for each borrower.
Please reach out to review your personal plans and we can help you weigh the risks based on your personal financial situation.
It was an honour to be asked by CTV to share some thoughts on all of this and the local real estate market. You may have caught me on the early news last night, or you can read the article.
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So you’re thinking about co-signing on a mortgage? Great, let’s talk about what that looks like. Although it’s nice to be in a position to help someone qualify for a mortgage, it’s not a decision that you should make lightly. Co-signing a mortgage could have a significant impact on your financial future. Here are some things to consider. You’re fully responsible for the mortgage. Regardless if you’re the principal borrower, co-borrower, or co-signor, if your name is on the mortgage, you are 100% responsible for the debt of the mortgage. Although the term co-signor makes it sound like you’re somehow removed from the actual mortgage, you have all the same legal obligations as everyone else on the mortgage. When you co-sign for a mortgage, you guarantee that the mortgage payments will be made, even if you aren’t the one making them. So, if the primary applicant cannot make the payments for whatever reason, you’ll be expected to make them on their behalf. If payments aren’t made, and the mortgage goes into default, the lender will take legal action. This could negatively impact your credit score. So it’s an excellent idea to make sure you trust the primary applicant or have a way to monitor that payments are, in fact, being made so that you don’t end up in a bad financial situation. You’re on the mortgage until they can qualify to remove you. Once the initial mortgage term has been completed, you won’t be automatically removed from the mortgage. The primary applicant will have to make a new application in their own name and qualify for the mortgage on their own merit. If they don’t qualify, you’ll be kept on the mortgage for the next term. So before co-signing, it’s a good idea to discuss how long you can expect your name will be on the mortgage. Having a clear and open conversation with the primary applicant and your independent mortgage professional will help outline expectations. Co-signing a mortgage impacts your debt service ratio. When you co-sign for a mortgage, all of the debt of the co-signed mortgage is counted in your debt service ratios. This means that if you’re looking to qualify for another mortgage in the future, you’ll have to include the payments of the co-signed mortgage in those calculations, even though you aren’t the one making the payments directly. As this could significantly impact the amount you could borrow in the future, before you co-sign a mortgage, you’ll want to assess your financial future and decide if co-signing makes sense. Co-signing a mortgage means helping someone get ahead. While there are certainly things to consider when agreeing to co-sign on a mortgage application, chances are, by being a co-signor, you'll be helping someone you care for get ahead in life. The key to co-signing well is to outline expectations and over-communicate through the mortgage process. If you have any questions about co-signing on a mortgage or about the mortgage application process in general, please connect anytime. It would be a pleasure to work with you.
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LET'S TALK
MARCI DEANE
MORTGAGE BROKER
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The first step is to start a conversation with me.
