Here’s how Fed cuts could impact the BoC’s thinking
The US Federal Reserve’s long-anticipated rate cut—its first of 2025—has set the stage for renewed debate over the Bank of Canada’s (BoC) next steps, as Canadian mortgage professionals weigh the cross-border ripple effects.
After months of holding steady, the Fed delivered a 25-basis-point cut to the federal funds rate, moving it to a range between 4% and 4.25%. Eleven of twelve Federal Open Market Committee members supported the move, with only Stephen Miran pushing for a deeper cut.
The decision followed a string of weaker-than-expected US jobs reports and persistent inflation concerns, prompting Fed chair Jerome Powell to describe the move as a “risk management cut.”
Mortgage industry leaders have been quick to parse the implications. “I think that we’re not done with cuts, but I think that the expectation that there will be multiple cuts this year and multiple cuts next year is off the table,” Melissa Cohn, regional vice president at William Raveis Mortgage, told Mortgage Professional America.
“They’re still very much concerned about the inflationary impact of these tariffs, and we really have not yet begun to see the real impact.”
The US is Canada’s largest trading partner. Fed rate cuts are often a response to slowing US growth, which can spill over into Canada via reduced demand for Canadian exports.
If the US economy slows, the BoC may anticipate weaker Canadian growth and adjust its outlook and policy accordingly.
Mike Fratantoni, chief economist at the Mortgage Bankers Association, said the Fed’s move signals caution, not panic. “The projections show that the median FOMC member anticipates two additional cuts in 2025 and one more in 2026, with the expectation that the job market will remain soft while inflation, while rising, won’t move too far before returning to the Fed’s 2% target,” Fratantoni said.
How Fed moves shape Canadian policy
While the Fed’s actions do not directly dictate Canadian rates, the BoC often faces pressure to keep pace to avoid currency volatility and capital outflows.
If a Fed cut leads to a weaker USD and a stronger CAD, import prices in Canada may fall, reducing inflationary pressures. This could give the BoC more room to cut rates if needed.
Historically, a Fed cut can ease the path for the BoC to follow, but Canadian economic fundamentals remain a key driver.
Recent GDP data showed Canada’s economy grew 0.2% in July, breaking a three-month flat streak. BMO’s Benjamin Reitzes said, “The Canadian economy continues to hang in there, suggesting no increased urgency for the BoC to cut rates. Still, underlying softness in the economy will likely drive further easing.”
TD’s Maria Solovieva flagged “below-trend growth and softer labour demand,” supporting the case for a cut, while Scotiabank’s Derek Holt noted that the latest GDP numbers were “not surprising the BoC.”
What’s next for Canadian mortgage rates?
With the BoC’s next rate decision set for October 29, markets remain split. Analysts point to upcoming jobs and inflation data as pivotal. For now, the Fed’s move has increased expectations that Canadian rates could head lower, but the BoC’s cautious tone suggests any action will be measured.
Source CMP
By Liezel Once
