What does the rate cut mean?
The immediate impact of today’s rate cut will be interest rate relief for Canadians.
As a result of today’s rate cut, most Canadian lenders will now lower their prime rates to 6.45%, from the previous 6.7%. This in turn will cause variable-rate borrowing products, including variable-rate mortgages, to also drop, as their pricing is based on prime plus or minus a percentage. Those with home equity lines of credit (HELOCs) will also see their interest rates decrease.
Will the BoC continue to drop its rate?
Today’s quarter-point cut was widely anticipated. In fact, markets had priced in a 100% chance that it would occur. The deal for the rate cut was sealed after the latest inflation numbers trended in the direction the BoC wants: down between 2% and 3%. The July Consumer Price Index (CPI) report revealed inflation fell to 2.5%.
“As expected, inflation slowed further to 2.5% in July. The Bank’s preferred measures of core inflation averaged around 2.5% and the share of components of the consumer price index growing above 3% is roughly at its historical norm,” wrote the BoC’s Governing Council—the body that makes the central bank’s interest rate decisions—in its announcement.
The BoC also pointed out that shelter inflation—the largest contributor to the CPI—is also starting to slow. This includes mortgage interest costs (MIC), which measures the amount of interest Canadians pay on their mortgages. As a result of the previous two rate cuts, MIC dropped to 21% from 22.3% in July. That’s great news. but it also reflects just how much mortgage costs have soared for Canadians since the start of the pandemic.
In addition to inflation, the BoC also stated that recently revealed second quarter gross domestic product (GDP) numbers indicate the economy slowed in June and July. This suggests further rate cuts are to come; in fact, it’s expected the BoC will dole out two more quarter-point cuts in its October and December announcements this year, bringing the Overnight Lending Rate to 3.75%—its lowest since December 2022.
The prognosis is also looking good for 2025, should economic trends continue as the BoC expects. And we could be in store for another four cuts, totalling 1%, by the end of next year, which would bring the benchmark rate to 2.75%. That would be a low not seen since September of 2022, when the BoC increased its rate from 2.5% straight to 3.75% as part of its aggressive hiking cycle.
What does the BoC rate announcement mean to you?
What does it mean for you, your home, your finances and more? Read on.
… if you’re a Canadian with a mortgage
Renewing or borrowing, this rate cut spells relief for Canadians.
The impact on variable-rate mortgages
Today’s rate cut is music to variable mortgage holders’ ears. Variable interest rates will lower to reflect the cut, and how borrowers will be impacted will depend on the type of variable mortgage they have. Those who hold adjustable-rate variable mortgages will see their monthly payment immediately lower, while those on a fixed payment schedule will see more of their payment going towards their principal mortgage balance.
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