The Bank of Canada is expected to cut interest rates further, potentially lowering the overnight rate to 2.75% by mid-2025. This shift is driven by easing inflationary pressures and stabilizing economic conditions. Economists predict the central bank will reduce the policy rate from 4.5% to 3% by next July.
The overnight rate is expected to average 2.75% in 2026. The survey results show analysts’ outlook aligning with market expectations for a gradual return to less restrictive monetary policy. Traders in overnight swaps also bet on more than 150 basis points of easing by next summer.
Governor Tiff Macklem’s coveted soft landing is still the base case scenario, with Canada’s economy expected to grow 1.7% in 2025 as interest rates start easing and export growth ramps up. Inflation is forecast to reach the bank’s 2% target by the end of 2025, from the current 2.5% yearly pace. The shift in outlook comes amid changing bets for the path of the Federal Reserve, where Chair Jerome Powell is seen joining the global trend in loosening monetary conditions in September.
With the Fed set to cut, Macklem can keep normalizing borrowing costs without worrying about moving too far ahead of the Fed and risking consequences for the Canadian dollar. The shifting global outlook for rates also carries some positive news for Prime Minister Justin Trudeau and the country’s fiscal policymakers, who are struggling in the polls and facing elevated debt service costs. Yields on 10-year Canadian government bonds are expected to average about 3% over the next year, compared with over 3.25% in the July survey.
Bank adjusts interest rates outlook
The Canadian mortgage market could see a 10-15% increase in mortgage origination volume over the next 12-18 months, with 5-year fixed mortgage rates potentially dropping below 4%. Nearly 45% of Canadian mortgages will be renewed in 18 months, potentially driving refinancing.
Pineapple, a mortgage company, projects a 20-25% growth in mortgage origination volume over the next two years. The company aims to capitalize on this trend by focusing on data-driven decision-making and strategic customer engagement, mainly targeting the upcoming wave of mortgage renewals. However, competition in the mortgage industry is likely to intensify.
Pineapple’s success will depend on its ability to leverage data analytics for targeted customer engagement and innovative solutions. The stock market seems energized as Canada’s central bank decreases interest rates. Historically, the stock market has enjoyed gains of around 8-10% in the six months following a rate cut.
Lower interest rates will benefit Aritzia, a prominent retail brand on the Toronto Stock Exchange. Lower borrowing costs will make the company’s strategic expansion plans more affordable and potentially more profitable. Aritzia’s strong operational performance, combined with the economic tailwinds from rate cuts, sets the stage for continued success.
The company’s gross profit margin increased by 510 basis points in Q1 2025, and its adjusted earnings before interest, taxes, depreciation, and amortization soared by 70.6%. As the economic environment becomes more favorable due to lower interest rates, Aritzia is well-equipped to capitalize on these trends, leveraging its brand strength, expansion strategy, and financial acumen to deliver sustained growth.
