Most signs point to lower interest rates on the way for mortgage holders.
They have reason to be disappointed with last week’s decision by the Bank of Canada (BoC) to keep its benchmark, or policy, rate unchanged at 2.75 per cent, where it has been since March.
But the current soft economy could weaken further this year as U.S. tariffs, a lagging economic factor, begin to put more downward pressure on job creation, business investment and consumer spending.
By this fall, the economy will likely need some monetary stimulus. And that has several market analysts expecting one or more BoC rate cuts this year, bringing the benchmark rate down to as low as 2.25 per cent.
That’s close to the BoC’s neutral, or ideal, rate for an economy neither in need of stimulus nor in danger of overheating with inflation the result.
The BoC will come under increasing pressure to cut rates.
The central bank itself calculates that about 60 per cent of Canada’s outstanding home mortgages are due for renewal over the next two years.
Current rates of four per cent to 4.5 per cent on five-year-fixed mortgages are much higher than the less than two per cent rates of 2020 and 2021 when many mortgages were granted.
The bank’s analysis finds that mortgage holders with five-year fixed mortgages, one of the most popular mortgage types, can expect average payment increases of 10 per cent to 20 per cent on renewal.
Interest rates are down by almost half from their 2023 peak. Yet debt management remains difficult for many Canadians.
Equifax, the consumer credit agency, reports that the mortgage delinquency rate in Ontario jumped by more than 71 per cent in this year’s first quarter from a year earlier.
In B.C., another of Canada’s most expensive real estate markets, the delinquency rate rose by 33 per cent in that period.
The delinquency rate measures mortgages on which no payment has been made for at least 90 days.
Delinquency rates have also risen for credit cards and other forms of consumer borrowing.
The BoC held rates constant in its latest rate-setting decision out of concern that several of its inflation measures are still too high.
Excluding the impact of the carbon tax’s elimination, the headline, or general, rate of inflation was 2.5 per cent in June, at the high end of the BoC’s target range of one per cent to three per cent.
But the BoC has emphasized that it is prepared to provide additional rate relief.
“If a weakening economy puts further downward pressure on inflation and the upward price pressures from the trade disruptions are contained, there may be a need for a reduction in the policy interest rate,” Tiff Macklem, governor of the BoC, said last week.
Second-quarter GDP is expected to eke out a gain of only 0.1 per cent, down from 2.2 per cent growth in the first quarter.
Most of the 80,000 new jobs reported in June are part-time positions. And exports, mostly to the U.S., have dropped by 27 per cent since their peak in January.
In the BoC’s latest quarterly surveys of Canadians, businesses reported that they are cutting back on investment and hiring. Consumers in the survey said they worry about their jobs and have put off major purchases.
We are not in a technical recession — back-to-back quarters of negative growth — but it feels like we are.
“The sad reality is that tariffs mean the economy is going to work less efficiently,” Macklem said. “The economy will resume growing, but it will be on a permanently lower path” if U.S. President Donald Trump doesn’t lift his tariffs.
Trump is the wild card in every forecast, of course.
So far, most Canadian exports are entering the U.S. duty free because they comply with the Canada-U.S.-Mexico Agreement (CUSMA).
But at any time, Trump could raise his already punishing sectoral tariffs on steel, aluminum, autos and lumber, or extend his surtaxes to new sectors.
“The outlook for the economy under the current tariff regime shows a modest recovery starting in the third quarter, but with an economy expanding below trend,” said TD senior economist Andrew Hencic in a recent client note. “This leaves the door open for future rate cut(s) under stable inflation.”
Factors by which Canada can break out of its slow-growth funk include a moderation in wage increases which is already underway, a strengthening of the Canadian dollar that reduces the cost of imports, and a Fall Economic Statement from the Carney government that is sure to include stimulus measures.
And some additional rate relief from the BoC would help revive the current sagging retail sector and a sluggish GTA real estate market, where buyers are now offering less than asking prices.
Tariff relief would help too. But Canadians, with their prudent spending and “staycations,” are too smart to expect that.
