According to Ben Rabidoux of Edge Realty Analytics, the central bank could cut its policy rate down to 1.75% by July, driven by troubling economic trends he sees ahead.
This would bring the prime rate to 3.95%, ultimately lowering interest rates for variable-rate mortgages, personal loans, and home equity lines of credit by an additional 200 basis points, or two percentage points.
“The anticipation is we get another (50-basis-point rate cut) in December and then it’s just this kind of a slow grind down until we pause in the spring at around 3%,” Rabidoux said on a recent subscriber call. “That’s where markets think we’re going, but I think that’s way wrong.”
“To understand why I think rates have to go a lot lower, we have to put ourselves into the headspace of the Bank of Canada,” he explained, highlighting several factors he sees as key concerns for the central bank.
One major driver behind this prediction is Canada’s per capita Gross Domestic Product (GDP), which has been declining for the past two years. Coupled with the federal government’s recent decision to scale back immigration—which could result in negative population growth over the next two years—Rabidoux says this will be a “huge issue” for the economy in the near term.
“Let’s remember that all of our GDP growth in this country has come from population growth…and we can safely bet the population growth for the next two years is not going to look like it has over the last few years, Rabidoux said, adding it could lead to a slight economic contraction.
Rates need to drop further to avoid renewal payment shock
On top of slowing economic growth and a weakening labour market, there’s also the massive wave of mortgage renewals coming up in 2025 and 2026. Rabidoux says this will lead to payment increases of up to 40% for many borrowers who are coming out of terms with the rock-bottom rates that were secured during the pandemic.
“If you’re the Bank of Canada…you know that this is the issue that’s kind of looming over the next couple of years,” Rabidoux said. “They have to get rates lower. They’re still not nearly low enough to avoid this kind of payment shock.“
Canadians have remained resilient despite record-high interest rates over the past couple of years. This is particularly true for mortgage borrowers, with mortgage arrears and insolvencies staying low by historical standards at just 0.20%.
While this should remain the case for most regions across Canada, the Canada Mortgage and Housing Corporation (CMHC) warned last week that mortgage arrears in Toronto and Vancouver are likely to reach decade-highs over the next six to 12 months.
While Rabidoux acknowledges there are “pockets of concern,” he adds that they are not yet “alarming.”
“But on the business side, they’re very alarming,” he said, noting that business insolvencies are now spiking. “Businesses are in trouble, and you can only have businesses in trouble for so long before they start cutting staff and before that starts showing up in the labour market.”
Looking ahead, Rabidoux believes that as long as inflation remains within the Bank of Canada’s target range—especially with rent and mortgage interest costs showing signs of cooling—the central bank will have the room it needs to act, potentially delivering two more percentage points worth of rate cuts by mid-2025.
Big banks see BoC policy rate falling more modestly
While Rabidoux’s prediction is somewhat of an outlier, at least one of Canada’s Big Banks shares a similar outlook, forecasting the Bank of Canada’ policy rate will end this cycle just a quarter-point higher.
RBC is currently predicting the BoC’s policy rate will drop to 2.00% by the third quarter of next year.
Scotiabank, meanwhile, is at the upper range of forecasts, as it sees the central bank delivering 75 basis points more of easing before remaining on hold at 3.00% for much of next year.
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Last modified: November 25, 2024
