Canadian Interest Rate Forecast 2024: Are High Rates Here To Stay?

Interest rates have been at historic levels for the past year in Canada. While rates rose steadily throughout 2023, experts are predicting rates will remain high in 2024, though they may begin to drop.

When interest rates are high, it’s generally because the Bank of Canada raised its policy rate to try to tamper levels of high inflation. Now that inflation is beginning to decline, the central bank has started holding rates steady. If inflation cools enough, the Bank of Canada may begin easing interest rates towards the later half of this year.

High interest rates make it more expensive to finance purchases and carry debt. But they also help boost savings account interest rates, allowing you to earn a bigger return on your money.

Let’s dive into why interest rates are high, where they’re headed in 2024, when rate relief is expected, and what that means for your money.

Why are interest rates high right now?

Before we can jump into the interest rate forecast, we need to back up to understand how we got here.

During the COVID-19 pandemic, a number of issues began that led prices to rise. First, there were supply chain issues that limited the number of certain products that could be produced. This slowdown and an increased consumer demand for certain items pushed the demand for supplies even higher.

When consumer demand is greater than availability, prices tend to rise. When items become more desirable, you can charge more for them. However, when supply chain issues make production more expensive and manufacturer costs rise, sellers have to increase prices to protect their profit margins.

Rising prices caused inflation to skyrocket

In 2022, inflation — the increase in prices and decrease in the value of money — soared beyond the Bank of Canada's control. Canada’s central bank is tasked with keeping inflation at bay, roughly around 2% each year. The central bank is also responsible for keeping the unemployment rate low.

Inflation isn’t inherently wrong, though. An average price increase of 2% year over year is the gold standard of a well-functioning economy. If you want economic growth, you need a small level of inflation. And it’s normal for inflation to ebb and flow. But when inflation surpasses this 2% marker and economic growth explodes faster than the Bank of Canada can keep up with, things can get out of control quickly.

And inflation was climbing well past this 2% target rate, reaching a record 8.1% year-over-year growth percentage in June of 2022, the highest level since 1983, according to the Consumer Price Index.

To combat runaway inflation, the Bank of Canada raised interest rates

When inflation climbs far past the Bank of Canada’s 2% mandate, the agency’s main course of action to slow the economy is to raise the policy rate — the interest rates at which banks lend money to one another.

When this prime rate is hiked, bank’s generally follow suit and raise rates on consumer products like credit cards, loans, mortgages, and home equity loans. This increase allows the bank to cover the increased cost of borrowing money from other banks to fund large loans or withdrawals.

On the upside, banks also usually raise savings interest rates on interest-bearing savings products like high-interest savings accounts. That’s why Canadian savings rates are currently at historic highs.

As rates on financing become more expensive, the rate at which consumers borrow often slows. Many lenders may even tighten the requirements needed to get approved for a loan, which also slows the act of borrowing money. All of this helps slow the economy, ideally working to bring inflation down.

What happened in Canada’s economy following the pandemic carried to other countries as well. In the US, inflation increased quickly, triggering the Federal Reserve to also raise interest rates several times in 2022 and 2023. Similar to the Bank of Canada, the Federal Reserve has since paused its streak of rate hikes and is expected to hold interest rates where they are until mid-year when rate decreases are anticipated. As of right now, no further rate increase is expected.

How many rate hikes has the Bank of Canada made?

The Bank of Canada first raised its policy rate by 25 basis points in March 2022, bringing the federal rate from 0.25%—where it had remained since 2020—to 0.50%. The Central Bank of Canada has made ten rate increase decisions in total since 2022.

Date

Rate Decision

Policy Rate Range

March 2, 2022

Raised by 0.25%

0.50%

April 13, 2022

Raised by 0.50%

1.00%

June 1, 2022

Raised by 0.50%

1.50%

July 13, 2022

Raised by 1.00%

2.50%

Sept. 7, 2022

Raised by 0.75%

3.25%

Oct. 26, 2022

Raised by 0.50%

3.75%

Dec. 7, 2022

Raised by 0.50%

4.25%

Jan. 25, 2023

Raised by 0.25%

4.50%

March 8, 2023

Held steady

4.50%

April 12, 2023

Held steady

4.50%

June 7, 2023

Raised by 0.25%

4.75%

July 12, 2023

Raised by 0.25%

5.00%

Sept. 6, 2023

Held steady

5.00%

Oct. 25, 2023

Held steady

5.00%

Dec. 6, 2023

Held steady

5.00%

Jan. 24, 2024

Held steady

5.00%

Will interest rates see relief in 2024?

At its latest policy meeting, the Bank of Canada held rates steady at 5.00%. It has indicated it expects to be done with rate hikes, and may start to lower interest rates as soon as this year.

Inflation has been trending downward since the latter half of 2023, nearing, but not yet reaching the central bank’s 2% goal. However, while annual inflation was at 3.1% in November, according to the Consumer Price Index, it inched up to 3.4% year-over-year in December.

“We need to stay the course,” said Tiff Macklem, governor of the Bank of Canada in a January 24 press conference. “Inflation is coming down as higher interest rates restrain demand in the Canadian economy. But inflation is still too high, and underlying inflationary pressures persist. We need to give these higher rates time to do their work.”

The central bank still needs to tame inflation, but expects it will take a few months for the full extent of its previous rate hikes to take effect.

The bank has indicated it will continue to hold its policy rate steady as long as there are no surprises in the monthly inflation reports. It has also indicated that rate cuts are anticipated towards the end of 2024, starting as early as this summer.

A recent Reuters poll from top economists expects the first rate cut to happen in June 2024. One-third of these economists predict the first rate cut could happen sooner, in April 2024.

Most economists agreed that the central bank would lower the policy rate from 5.00% to 4.00% by the end of the year. This is likely to be done in several 25-basis point drops, though the central bank might move more aggressively if needed.

What expected rate cuts mean for your money

Okay, so the Bank of Canada will likely lower its policy rate. What does that mean for you? Well, when the central bank first cuts rates, banks are expected to do the same, lowering interest rates on consumer products.

This means interest rates on loans, mortgages, and credit cards are likely to drop. And savings interest rates will also start dipping. Whether you’re carrying debt or looking to earn more on your money, here’s how potential rate cuts could impact you.

Fixed mortgage rates will drop in 2024

If all goes according to plan, you’ll start to see record-high mortgage interest rates stumble. While fixed interest rates are unlikely to return to the record lows we saw in 2020 and 2021, it can make buying a home more affordable for anyone who feels priced out of the home buying market right now.

Both fixed rate mortgages and variable rate mortgages should see slight decreases in 2024, with more significant shifts happening towards the end of the year. The mortgage rate forecast shows rates will likely decline, but high home prices and the sting of inflation may still keep buyers locked out for a bit longer.

Why? Well, although fixed interest rate decreases are a positive sign for a flailing Canadian housing market, the market won’t rebound overnight. A slowing economy can help lower rates, but it’s going to take time for them to normalize. The Central Bank’s overnight rate is still well over 2%. Plus, inflation is still a wild card. Although high inflation seems to have stabilized, the Bank of Canada will need to monitor the Canadian economy meeting by meeting to ensure its rate cut policy continues to make sense.

Mortgage holders who currently have a variable rate mortgage can expect a lower variable interest rate towards the end of the year, and likely into 2025, saving you money on your monthly mortgage payments.

Credit card APRs will slowly start to decline

As the central bank raised its overnight rate to lower inflation, credit card companies and big banks also raised interest rates on credit cards. Right now many credit card annual percentage rates average over 20%.

As long as lower inflation is on the horizon, rate cuts should help reduce the amount of interest your credit card company is charging you.

Why does this matter? Well, if you’re carrying a balance on our credit card, you’re subject to your card’s APR (its interest rate plus fees). With some APRs ranging from 20% to 25.99%, that means you may be paying card companies a small fortune in interest.

If APRs drop, you’ll see some relief in terms of interest payments, though it likely won’t be significant. If you’re experiencing credit card debt, working to consolidate your debt or pay off your balance faster can help you alleviate high interest payments.

The cost of borrowing will decrease

If you’ve been holding off on buying a car or taking out a personal loan or line of credit in Canada, these fixed rate products are likely to see a drop in interest rates later in 2024. Interest rate cuts from the Bank of Canada should lower the financial cost of taking out a loan, which is good news if you’ll need to take on a new credit account this year.

Savings rates will remain high, but start to inch down

If you’ve been taking advantage of high savings rates, you’ll continue to earn competitive interest on your money throughout 2024. However, expect big banks to start lowering interest rates this year. If you have a high interest savings account that offers a temporary high rate, you might see your temporary period shorten.

Earning as much interest as you with a savings account can now while savings rates remain at record highs can help you grow your money faster. Locking in a high interest rate on a guaranteed interest certificate is a smart way to safeguard your finances during economic instability by earning a high fixed interest rate on money you already have saved. Just make sure you can lock your money away for the entire term — otherwise the early withdrawal penalty you pay may negate some of the high interest you earn.

If you don’t already have a high-interest savings account, it’s time to open one. You can consider a high interest account at an online bank or credit union, a tax-free savings account that comes with tax advantages, or an alternative type of savings account.

KOHO, for instance, offers a high interest savings option that can help you earn up to 5% on your money for a low monthly fee. In addition to earning interest, you’re also eligible for cash back offers, virtual credit card access, and can receive free access to your credit score. KOHO’s account also comes with overdraft protection coverage. When you build your credit score with KOHO, you’ll also be able to lock in better interest rates on financing products in the future, which can help you save money.