Changes to the BoC rate impacts the prime rate set by Canadian lenders, which in turn affects the pricing of variable-based borrowing products, which are based on the prime rate plus or minus a percentage. Following this most recent cut, the prime rate at most Canadian lenders will drop to 5.95% from 6.45%. What does that mean to your money and your debt? Keep reading.
The BoC is taking action with this larger-than-usual cut
When the central bank lowers its benchmark rate, it typically does so in quarter-point increments —unless there’s an economic reason for a heftier cut. Half-percentage point decreases like today’s are rare, but they do have a precedent; the last time the BoC doled out cuts of this size was back in March 2020, when it implemented three in rapid succession to support the economy amid the onset of the COVID-19 pandemic. Outside of the COVID era, today’s rate cut is the largest since March 2009.
That the BoC is once again supersizing its cuts points to concerns that the economy is slowing at a faster pace than expected. The most recent inflation report for September from Statistics Canada revealed the year-over-year inflation as measured by the Consumer Price Index (CPI) fell to 1.6%, which is below the BoC’s 2% target. That’s considered sustainable for the Canadian economy. The BoC tweaks its benchmark rate to keep it as close as possible to target. When inflation is running hot, it hikes rates to cool consumer spending and access to credit. The opposite occurs when inflation gets too soft; the BoC must ease borrowing conditions to encourage consumption, and bolster economic growth, otherwise it risks an impending recession. We’re in the latter situation right now.
Will the BoC continue to drop its rate?
Should economic data, such as inflation, GDP, and job market numbers, continue to trend as it has, additional rate cuts are a certainty, including more supersized cuts. Much will hinge on the next CPI report, due out on November 19. Should inflation remain sluggish, that increases the chances of another half-point cut in the BoC’s next rate announcement, on December 11.
The BoC is also keen to lower its rate down to “neutral” state, which is a range between 2.25% to 3.25%. This again is a rate that neither inflames or stunts economic growth, and remaining above it too long poses economic risk.
Following this rate cut today, the overnight lending rate remains 0.50% above the higher end of the neutral range. Overall, analysts think the BoC will lower its rate by another 1.75% by the end of 2025.
What does the BoC rate announcement mean to you?
What does it mean for you, your home, your finances and more? Read on.
The impact on Canadians with a mortgage
Whether you’re shopping for a brand new mortgage rate or renewing your existing term, today’s rate cut will make it slightly more affordable to do so.
The impact on variable-rate mortgages
Variable mortgage rate holders are the most heavily impacted by the October rate cut, as their mortgage payments—or the portion of their payment that services interest—will immediately decrease along with their lenders’ prime rate. These borrowers in Canada also have much to look forward to, with anticipated rate cuts on the horizon.
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