At a time when interest rates are likely at or near their peak in Canada, experts warn that consumers should not expect rates to return to pre-pandemic levels.
The central bank is more likely to reduce its overnight rate to between 2% and 3%, but not anytime soon, warned David Macdonald, senior economist at the Canadian Center for Policy Alternatives.
“It’s far from imminent. It won’t be next year,” he said, adding that consumers may not yet fully understand this.
The Bank of Canada has imposed an intense tightening cycle on its key interest rate in recent months. While it was still close to zero in March 2022, it was gradually increased, until it reached 5% in July, by the central bank, which however maintained it at this level in September and Wednesday this week. The overnight rate affects the interest rates offered by financial institutions.
The Bank of Canada’s overnight rate was 1.75% throughout 2019, before the central bank lowered it to 0.25% to support the economy at the start of the COVID pandemic -19.
The central bank is widely expected to keep rates high in the near term, aiming to keep inflation in check. But even once rates begin to fall, economists say a return to pre-pandemic rates is not feasible.
The Canadian economy and consumers are experiencing an accelerated paradigm shift, said Beata Caranci, chief economist at TD Bank, which has the effect of a glass of cold water in the face.
Too much optimism
Mme Caranci says Canadians are aware that interest rates won’t return to pre-pandemic levels, but she also thinks they are overly optimistic about when and how quickly they will fall.
One of the points I stress to our clients is that the rate at which rates have increased will not be the rate at which they will decrease.
Borrowers are increasingly opting for shorter terms on their mortgages, hoping rates will be lower in a year or two, she noted.
It could well happen, but it’s not a guarantee, she explained.
“If you look at our forecasts or the consensus on the street […], most expect reductions by the second half of next year. But this assumes that the economy will be weaker than it is today,” noted Mr.me Caranci.
“One of the points I stress to our clients is that the speed at which rates have increased will not be the rate at which they will decrease. »
In a report released Wednesday, CIBC Capital Markets chief economist Avery Shenfeld said the central bank would likely be able to lower its key rate to 3.5% by the end of the year next.
With Nojoud Al Mallees