As Canadians continue to feel the pinch from rising living costs and an unpredictable economy, many are asking the same question: Are interest rates going to drop in Canada? The answer, according to most economists, is yes—but with some key caveats.
The Bank of Canada (BoC) paused its rate cuts in April 2025, holding the overnight policy rate at 2.75%. This came after seven consecutive rate cuts beginning in June 2024, which brought the rate down from a peak of 5.00% to its lowest level since August 2022. Many experts now anticipate that another rate cut could come as early as June 2025, potentially pushing the policy rate down to 2.25% by year-end.
Why Are Interest Rates Expected to Fall?
1. Inflation Trends
While annual inflation has cooled to 2.3%, core inflation—a measure that strips out volatile items—remains stubborn at 2.9%. This divergence is complicating the BoC’s decisions but suggests that further easing may be needed if inflation stabilizes.
2. Economic Weakness
Canada’s economy is showing signs of strain:
- Job growth missed expectations, with only 7,400 jobs added in April versus an expected 10,000.
- Unemployment climbed to 6.9%, its highest level outside of the pandemic since 2017.
- Key sectors like manufacturing, construction, and trade experienced steep declines due to ongoing U.S. trade tariffs and a broader slowdown in global demand.
3. Labour Market Stress
Experts believe the weakened labour market is a key signal. Public administration hiring tied to the federal election temporarily offset deeper losses in the private sector. Without this bump, April employment numbers would have shown another month of contraction.
What Are the Experts Saying?
- Charles St-Arnaud (Alberta Central): “The weakening job market raises the odds of a rate cut in June.”
- Douglas Porter (BMO): “This is a weak report. Labour market slack is building, and wage gains have slowed.”
- Stephen Brown (Capital Economics): “April’s job numbers support our view that the Bank will resume cutting rates.”
- Claire Fan (RBC): “Trade-related job losses are likely to push unemployment above 7%.”
- Tu Nguyen (RSM Canada): “Manufacturing and trade sectors are bracing for further job losses.”
Impact on Mortgage Rates
If the Bank of Canada resumes cutting rates, mortgage rates in Canada could continue to fall, particularly variable-rate mortgages, which are directly influenced by the prime rate. Fixed-rate mortgages are guided more by government bond yields but tend to follow the general direction of interest rate trends.
Overall Outlook:
- Variable mortgage rates are expected to trend below 5%.
- Fixed rates may soften if bond yields decline with a weakening economy.
- Rate-sensitive borrowers could see relief in the second half of 2025.
What Could Change the Forecast?
While the expectation for lower rates is strong, the BoC’s decisions hinge on evolving economic data, especially:
- The May 20 CPI release, which could reveal whether inflation pressures are indeed easing.
- Developments in U.S. trade policy, as tariffs continue to weigh heavily on Canadian exporters.
- The federal government’s fiscal response, which may influence the Bank’s need for monetary easing.
Conclusion
So, are interest rates going to drop in Canada? The evidence strongly suggests yes—but not without uncertainty. The next rate decision in June will be pivotal, and ongoing weakness in jobs and GDP figures could push the Bank of Canada to act.
Planning Ahead
If you’re navigating the financial implications of these interest rate shifts and preparing for your retirement, now is the time to review your strategy.
