As expected, the Bank of Canada held its overnight rate at 5 per cent this morning. In the statement accompanying the decision, the Bank noted that economic growth stalled through the middle quarters of 2023 and that slowdown in growth is expected to extend into the fourth quarter. As a result, inflationary pressure is easing, though the Bank stated that it is still concerned about risks to the outlook for inflation and wants to see a sustained easing of core inflation in future months.

Given the evidence of a slowing economy and some long-awaited downward momentum in core inflation, it appears likely that the Bank of Canada’s rate-tightening cycle is at an end.  If so, the conversation around Bank of Canada meetings in 2024 will shift toward when the Bank might lower rates and how fast. Given that the Bank’s estimate for its neutral rate is between 2 and 3 per cent, we can expect between 200 and 300 basis points of rate cuts once it is clear that inflation is returning to its 2 per cent target. 

After hitting a 15-year high this fall, Canadian bond yields have been tumbling to finish the year as financial markets process meaningful progress on reducing inflation and the projected end of central bank rate hikes. The five-year Government of Canada bond yield has trended near 3.5 per cent over the last week and if that trend sustains, we will see a meaningful decline in fixed mortgage rates to start 2024.

Our forecast is for the average 5-year fixed mortgage rate to fall to about 5 per cent by the end of 2024, while variable rates will begin falling as the Bank of Canada lowers its overnight rate starting in the first or second quarter of next year.