With Canada’s official inflation measure now well below the two per cent target, two-thirds of economists think the Bank of Canada will slash its rate by 50 basis points on Wednesday. (A basis point is one-hundredth of a percentage point.)

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Look to bond yields after next week's Bank of Canada announcement. They're like a GPS for fixed-rate mortgages Back to video

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If this rate-slashing bonanza unfolds, keep your eyes glued to bond yields. Yields are like the GPS for fixed mortgage rates, and fixed rates are what most mortgage shoppers choose. Every borrower wants to know where the Bank of Canada will take rates next, and the bond market could give us those clues.

To a casual rate watcher, one might expect yields to fall, but bond markets are anticipatory. Eventually they start expecting looser Bank of Canada policy to turbocharge the economy and heat up inflation. That’s usually enough for fixed rates to bottom out for a while before rising yields take them higher.

We’re likely not there yet, however. Inflation is still doing its best impression of a lead balloon and the central bank fears it could fall too much below the two per cent bullseye. That’s why bond traders are betting on more cuts than a drunk barber — 100 basis points total by January and a whopping 175 basis points by December 2025, according to forward rate data from CanDeal DNA.

If we get that 100 basis point haircut by January, the overnight rate will fall back to 3.25 per cent. That’s notable because it’s the top end of the Bank of Canada’s 2.25 to 3.25 per cent “neutral rate” range. Neutral is the theoretical sweet spot where monetary policy is neither stimulating nor restraining economic growth.

Usually, rates dive into or below neutral territory. That’s because central bankers are usually late on cutting and overcompensate to ensure inflation doesn’t fall too much. But as we tiptoe closer to the 2.75 per cent neutral midpoint, it becomes more likely the Bank of Canada will hit the snooze button on rate cuts.

Bond yields will eventually hit their own version of rock bottom, and a Trump win on November 5 would likely fast-track the process. His policies could jack up U.S. inflation by up to one point, according to Goldman Sachs. And let’s face it, U.S. inflation doesn’t need a passport to boost Canadian prices.

What happens next?

If the Bank of Canada slashes rates by 50 basis points as predicted, brace yourselves for five likely outcomes:

1. Floating-rate borrowers will feel like they’ve won a mini-lottery. With the average Canadian’s mortgage debt around $300,000, variable-rate mortgagors’ will find another $80 to $120 in their pockets each month, depending on their loan type. That’s money most can use to pay down debt or buy necessities without incurring more debt. Others will use it to finance discretionary purchases. Such spending sprees eventually spawn new jobs and added inflation.

2. Incrementally more homebuyers will rush to open houses on the belief they now qualify for a mortgage or need to beat the crowd. Yes, us commentators have been singing that tune since the first rate cut on June 5. Ultimately, however, falling rates will have their anticipated effect, making homebuying more budget-friendly — at least temporarily. For now, the effect will be largely psychological, unless there’s a drop in the government’s minimum qualifying rate (MQR). That’s the rate banks make mortgage applicants prove they can afford. For the MQR to fall, fixed rates need to drop, and that depends on how much more rate-cutting the market anticipates after Wednesday.

3. A 50 basis point cut would slash the average new conventional floating-rate mortgage from 5.60 per cent (prime minus 0.85 per cent) to 5.10 per cent. That’s about $30 in monthly savings per $100,000 borrowed — enough for a fancy coffee habit or a subscription to yet another streaming service you’ll never watch. It will also slash the annual income required to qualify for that variable mortgage by roughly $5,000, to $117,000 on a 30-year amortized $500,000 mortgage (assuming a well-qualified borrower has no other debts). That means, for some, their dream home might be less “dream” and more “attainable reality.”

4. Canada’s beloved loonie — which moves largely on U.S.-Canada interest rate differentials and energy prices — could take another hit (sorry, snowbirds). That could jack up the cost of foreign goods and services. Such imported inflation could potentially lessen the need for further rate cuts.

5. If inflation creeps higher in the next few months, expect economic pundits to question if the Bank of Canada has gone overboard with monetary easing. Rate cut expectations could then fizzle a bit, especially since North American labour markets and spending are still perky. That’s why a significant minority of Bay Street number-crunchers are advocating for a more cautious approach to monetary policy easing.

Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.  

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