A leading strategist, Royce Mendes of Desjardins, has suggested that the Bank of Canada has concluded its series of interest rate hikes due to the looming risks associated with mortgage renewals. Instead, Mendes predicts that rate cuts are on the horizon and could arrive in the middle of the next year. This change in direction is seen as necessary to prevent a potential economic downturn linked to Canada's mortgage market challenges. Mendes doesn't envision rates returning to zero but anticipates the Bank of Canada's policy rate to drop to around 2.5 percent to address the impending wave of mortgage renewals.
Mortgage renewals are emerging as a significant concern, as noted by Bank of Canada Governor Tiff Macklem during his testimony in Ottawa. The central bank's recent interest rate decision was influenced, in part, by the mortgage renewal factor. RBC banking analyst Darko Mihelic highlighted that approximately 60 percent of Canadian mortgages are set for renewal within the next three years, potentially leading to a financial "payment shock" for homeowners if rates don't decrease. Mendes, however, believes that the percentage of mortgages up for renewal may be even higher, with the real challenges expected to hit around the middle of 2025 and into 2026.
While addressing mortgage concerns, the Bank of Canada remains committed to its fight against inflation. Macklem hasn't specified when the rate cuts might occur. In September, the annual inflation rate dipped to 3.8 percent, which remained above the central bank's two percent target. Mendes suggests that the bank may not need to wait for inflation to reach that exact target to justify rate cuts, indicating that inflation below three percent could be sufficient. Currently, the Bank of Canada's benchmark rate stands at five percent, but Mendes foresees a significant decrease over the next year, projecting a rate of around 3.5 percent by the end of 2024, with continued reductions in 2025.
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