CIBC expects the Bank of Canada (BoC) to make significant interest rate cuts as early as December, which could result in a reduction of 50 basis points at a time.

With inflation nearly under control - as the core consumer price index has dropped to 2.5% - CIBC’s chief economist, Avery Shenfeld, points out that turning concerns into weak economic conditions could prompt the central bank to act more quickly to ease interest rates.

He explained that this is possible “as overcoming inflation approaches soon, with real interest rates remaining at constrained levels.”

Shenfeld wrote: “There is no logical reason for central bank governors to move very cautiously to provide assistance. While inflation remains above target, the Bank of Canada may find itself needing to make larger cuts to interest rates to prevent an economic recession.”

CIBC Interest Rate Forecast

CIBC and the National Bank are the only two among the six major banks currently expecting the Bank of Canada's interest rate to drop to 3.50% by the end of this year. With the current interest rate at 4.25%, and only two more meetings left to decide on interest rates this year, reaching 3.50% would require at least a 50 basis point (0.50%) cut during one of those meetings. Shenfeld noted that “the weak labor market in recent months has pushed us to lower our overnight rate target in Canada by another quarter point, to 2.25% [by the end of 2025], which is about half a point below the neutral rate.”

He added: “But to stay out of recession, we will also need to speed up the pace at which the central bank takes us there. After the quarter-point cut in October, we now foresee two half-point steps in December and January.”

In addition to a weak labor market and rising unemployment rates, Shenfeld also points to headwinds from mortgage renewals in the next two years.

More than two million mortgages - nearly half of all Canadian housing loans - are expected to be renewed over the next two years, many of which were originally secured at historically low interest rates. Estimates from the Canada Mortgage and Housing Corporation (CMHC) suggest that the average monthly mortgage payments could rise by 30% to 40%, putting additional financial pressure on borrowers.

Shenfeld said: “Although the Bank of Canada has started cutting the overnight rate, the average homeowner who bought in 2021 will still face a mortgage payment increase that would outpace their income growth if they refinanced today. Five-year mortgage rates would need to be 50 to 100 basis points lower for the increase in refinancing costs not to exceed nominal income growth, even though inflationary pressures have limited real income growth.”

Shenfeld does not expect interest rates to reach the levels necessary to alleviate refinancing pressures until mid-2025, a time when CIBC also expects an increase in per capita consumer spending.

As for the latest major banks’ forecasts, the major banks in Canada have recently revised their interest rate expectations, anticipating deeper and faster cuts from the Bank of Canada in response to rising economic challenges. The banks also expect a significant drop in 5-year bond yields, with both BMO and the National Bank forecasting a decrease to 2.55% by the end of 2025. This represents a significant drop from the current yield of the 5-year Canadian government bond, which stands at 2.71%.

Since bond yields typically influence fixed mortgage rates, this may lead lenders to continue lowering rates on these products.