CIBC forecasts ‘supersized’ Bank of Canada rate cut by year end

CIBC is predicting that the Bank of Canada (BoC) could introduce jumbo rate cuts as early as December, potentially slashing interest rates by 50 basis points at a time.

With inflation nearly under control—headline CPI has eased to 2.5%—CIBC’s chief economist Avery Shenfeld suggests that shifting concerns to weakening economic conditions could prompt the central bank to move more quickly to ease rates.

“With inflation soon to be vanquished, and real interest rates still at restrictive levels,
there’s no logical reason for central bankers to move too cautiously to provide relief,” Shenfeld wrote. “While inflation remains above target, the Bank of Canada could find itself needing to deliver larger rate cuts to prevent an economic stall.”

CIBC and National Bank are the only two among the Big 6 banks currently forecasting that the Bank of Canada’s policy rate will drop to 3.50% by the end of this year.

Given that the rate is currently at 4.25%, and with only two rate decision meetings left this year, reaching 3.50% would require at least one 50-basis-point (0.50%) rate cut during one of these meetings.

“The weakening labour market in recent months has us lowering our target for Canada’s overnight rate by a further quarter point, to 2.25% [by year-end 2025], which is about a half point below the neutral rate,” Shenfeld noted.

“But to stay out of a recession, we’ll also need to accelerate the pace at which the central bank will take us there,” he added. “After a quarter point cut in October, we now see two half-point steps in December and January.

In addition to a softening labour market and rising unemployment rate, Shenfeld also points to the headwind of mortgage renewals in the next two years.

More than two million mortgages—nearly half of all Canadian home loans—are expected to come up for renewal over the next two years, many of which were originally secured at historically low interest rates. The Canada Mortgage and Housing Corporation (CMHC) estimates that average monthly mortgage payments could surge by 30-40%, placing additional financial pressure on borrowers.

“Even though the Bank of Canada has started to reduce its overnight rate…an average homeowner who purchased in 2021 would still face a mortgage payment increase that would surpass their income growth if they refinanced today,” Shenfeld said. “Five-year mortgage rates would have to be 50-100bps lower still for the increase in refinancing costs to fall short of the rise in nominal incomes, although inflationary pressures have cut into income growth in real terms.”

Shenfeld doesn’t expect interest rates to reach levels necessary to ease refinancing pressures until the middle of 2025, which is also when CIBC expects to see a pick-up in per capita consumer spending.

The latest Big bank rate forecasts

Canada’s major banks have recently adjusted their rate forecasts, anticipating deeper and faster rate cuts from the Bank of Canada in response to mounting economic challenges.

The banks also predict significant drops in 5-year bond yields, with both BMO and National Bank forecasting a decline to 2.55% by the end of 2025. This marks a substantial decrease from the current 5-year Government of Canada bond yield, which sits at 2.71%. Since bond yields typically influence fixed mortgage rates, this could lead to lenders continuing to lower rates for these products.

The following are the latest interest rate and bond yield forecasts from the Big 6 banks, with any changes from our previous table in parentheses.