‘Stubborn’ fixed mortgage rates might not fall despite Bank of Canada cut

globalnews.ca:

The Bank of Canada’s latest oversized interest rate cut isn’t expected to deliver immediate relief to the Canadian fixed-mortgage market, experts warn.

The central bank delivered a second consecutive half-point drop to its policy rate on Wednesday. After five straight cuts in 2024, the Bank of Canada’s key rate now stands at 3.25 per cent.

Despite the substantial reduction in borrowing costs tied to the central bank’s benchmark rate, BMO senior economist Robert Kavcic warned in a note to clients Thursday that fixed mortgage rates in Canada may have already hit their floor.

While Canadians with variable-rate debt like some mortgages and home-equity lines of credit will have seen an immediate reduction in their rates of interest in line with the Bank of Canada’s 50-basis-point cut, Kavcic warned those shopping for fixed-rate mortgages likely won’t see the same easing.

That’s because fixed-rate mortgages don’t respond directly to the Bank of Canada’s policy rate. Changes in the benchmark rate affect this side of the market indirectly by influencing bond yields, which lenders use as a proxy to price their fixed mortgage offerings.

But amid signals from the Bank of Canada that it’s set to slow the pace of easing in 2025, Kavcic noted that the five-year Government of Canada bond yield — a key driver for popular five-year, fixed-rate mortgages — actually ticked higher on Wednesday.

While economists are widely expecting additional interest rate cuts next year, markets have also already priced in another 50-basis-points of easing by June, Kavcic said.

Unless there’s a sharp change in expectations for the Bank of Canada, he argued there might not be much more “downside” for five-year yields.

By extension, “the low for mortgage