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Market expectations for a Bank of Canada rate cut jumped from 32% to 38% after July’s inflation data hit 1.7%. Most borrowers are thinking the same thing: rates are finally going down.

They’re missing something crucial.

Variable rates might get a cut or two in the next six months. But fixed rates have already built in any cuts the Bank of Canada will make. The opportunity everyone’s waiting for has already been priced into the market.

Fixed rates work differently than most people think. They’re based on bond yields, which are essentially economists’ predictions about where borrowing costs will go over the term.

The Bank of Canada decision impacts variable rates directly. Fixed rates move on bond market expectations, not central bank announcements.

I’ve seen three-year fixed rates come back down this past week after climbing significantly. The broader trend shows shorter-term fixed rates offering better value as markets plateau and potentially reverse direction.

Variable rate borrowers face a different calculation entirely. Rates could turn around quickly. The question becomes whether the potential benefit outweighs the risk of betting on further cuts.

Canada’s inflation dropped well below the Bank of Canada’s 2% target. That gives them flexibility to ease monetary policy.

But here’s what most borrowers don’t understand: the market already anticipated this move. Bond yields reflect economist predictions about future rate paths, not just current announcements.

The spread between five-year fixed rates and Government of Canada bond yields typically runs 1% to 3%. But here’s the deeper reality: as Canadians, our rates are inherently tied to U.S. bond yields, which really predict fixed rates here in Canada.

Our economies are so intertwined that the Bank of Canada has already made cuts while the Fed hasn’t moved. Any extreme divergence by the Bank of Canada from what the Fed does will have negative impacts on our economy and our dollar.

If the Canadian dollar drops significantly, it causes inflationary pressures that put upward pressure on rates. The Bank of Canada is somewhat limited in what it can do until we see the Fed move.

With bond yields holding above 3% through July, fixed rates haven’t dropped as much as borrowers expected.

Six months ago, we expected more rate cuts than we’ve received. Now we’re looking at maybe one or two more cuts. With this U.S. constraint in mind, the upside doesn’t justify the risk of betting on the Bank of Canada’s next moves.

Rate and term decisions are deeply situational. Risk tolerance, market outlook, property timeline, financial circumstances, and family situation all factor into the strategy.

The decision goes beyond finding the lowest rate or following economic predictions.

For most borrowers right now, I believe the predictability of fixed rates outweighs the potential benefit of variable rates that might capture one or two more cuts.

Smart borrowers position themselves based on their specific situation rather than chasing rate predictions. They understand how rates actually work and make decisions accordingly.

The inflation data creates opportunity. Just not where most people are looking for it.