In its latest forecasts, the National Bank of Canada (NBC) expects the Bank of Canada to cut the key interest rate by 100 basis points (1%) to 2.25% by 2025, and then raise it by 50 basis points in 2026.

Reasons for the Expected Cuts and Increases

Taylor Schlaich, an economist at the National Bank of Canada, stated that the interest rate cut will come during a period where the key rate is set slightly below the neutral rate to stimulate the economy.

Schlaich explained:

“While Canada is not experiencing a recession, GDP growth has remained below its potential for a long time. To rebalance the economy, we need a period where growth exceeds potential.”

He added:

“This is why we expect to lower the interest rate to 2.25% for a year. Once the economy regains momentum and the recession is absorbed, the Bank of Canada will be able to return interest rates to the neutral rate, which we consider to be at 2.75%.”

Opinions of Other Banks

• The National Bank of Canada is the only one among the six major banks in Canada that expects an interest rate hike in 2026.

• Scotiabank expects the interest rate to remain high at 3.00% until 2026.

• On the other hand, banks such as TD, CIBC, BMO, and RBC anticipate continued interest rate cuts this year, but they have not issued long-term forecasts regarding rate hikes.

Interest Rate Cuts and Their Impact on Mortgage Renewals

The forecasts from the National Bank of Canada consider that approximately 60% of mortgages will be renewed in 2025 and 2026.

• Most of these mortgages are of the fixed-rate type for 5 years, which were issued during the real estate market boom in late 2020 and early 2021 when interest rates were at their lowest.

• Research from the Bank of Canada indicates that 60% of homeowners with these mortgages will face increases in their monthly payments upon renewal.

Schlaich states that a temporary cut in interest rates to 2.25% will help alleviate the impact of these increases on borrowers. He added:

“It’s no coincidence that the interest rate hikes begin after the main mortgage renewal period ends.”

• The expected interest rate cut from late 2025 to early 2026 will mitigate the financial impact on Canadian households.

The Impact on the Labor Market

• The National Bank of Canada expects the interest rate cut to be necessary to support slow economic growth and address challenges in the labor market.

• With job growth expected to be slower than population growth, the national unemployment rate is projected to rise to 7% by 2026, compared to the current rate of 6.7%.

Summary

The National Bank of Canada's forecasts indicate a flexible monetary policy aimed at supporting the economy during a period of slow growth and addressing labor market challenges, while considering the impact on borrowers. However, an interest rate hike in 2026 remains a potential step to rebalance the economy after the mortgage renewal period ends.