The Policy Rate Has Started to Come Down

The Bank of Canada (BoC) has finally trimmed its policy rate, and additional cuts are on the horizon. Borrowers are certainly excited. But the truth is that retail rates won’t all come down in step with the BoC’s rate cuts. That’s because retail rates are also influenced by factors such as US interest rate trends, the inverted yield curve and borrowing costs for financial institutions—not to mention the uncertainty surrounding the pace and amount of further policy rate cuts. The BoC’s policy rate can only come down if inflation continues to move closer to the 2% target. Fortunately for borrowers, the markets have already priced in several rate cuts for the next few years. Because of the sharply inverted bond yield curve, longer-term fixed rates are already much lower than variable rates and very short-term fixed rates. This means that fixed rates, even for longer terms, are still worth considering, especially for risk-averse borrowers.