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Interest rates in Canada could be down to 3.25% by end of 2025

Bloomberg Economics forecasts overnight lending rate will fall one and half per cent by the end of next year

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Indebted British Columbians could experience a drop of 1½ points in interest rates — a cut of more than a third — over the next 18 months, according to Bloomberg Economics.

On Sunday, the financial market research service released its interest rate estimates for central banks around the world, noting that the Bank of Canada was the first of the Group of Seven central banks to cut its benchmark overnight interest rate.

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The bank made its move last month, bringing the rate down from five per cent to 4.75 per cent. It had been at five per cent since July 12, 2023.

“(In Canada), robust domestic demand and indicators suggesting a near-term acceleration in spending mean the pace of rate cuts this year should be slow,” wrote Bloomberg analyst Stuart Paul.

“We expect the BoC to cut policy rates at a quarterly pace, bringing the overnight rate target to 4.25 per cent at year-end. The potential for further downside inflation surprises skew risks for the policy rate lower. But swift rate cuts — amid population growth as a consequence of immigration — could re-energize home prices and risk a secondary inflation surge.”

The analyst predicted two more rate cuts will come in September and December, and a benchmark interest rate of 3.25 per cent by the end of 2025.

Bloomberg predicts the only top central bank in the world that will not reduce interest rates over the next 18 months will be Japan, which has an overnight rate of just 0.1 per cent due to its stagnant economy.

The U.S. Federal Reserve has its rate set at 5.5 per cent, with a forecast of four per cent by the end of 2025.

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The Bank if Canada’s overnight benchmark rate is used by banks to set their interest rates for household mortgages, commercial loans, lines of credit and credit card debts.

During COVID-19, central banks around the world lowered rates to previously unknown levels, out of fear economic growth would come to a halt.

Interest rates are used as a tool to help manage the economy. The logic is that if economic growth is weak, then making money cheap to borrow encourages indebtedness and spending. If economic growth is too strong, signalled by rising inflation rates, then interest rates hikes can temper that growth.

In 2020, at the height of the pandemic, it was possible to get a five-year fixed interest rate on a home mortgage of less than two per cent. Now, homeowners are paying around five per cent for a five-year, fixed-term mortgage.

RBC is offering a five-year, fixed mortgage rate of 4.84 per cent.

The BoC’s next interest rate announcement is due July 24.

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