Bank of Canada cuts target interest rate by 0.25% in July 2024 announcement

Borrowing costs are poised to lower further today, as the Bank of Canada shaved another 25 basis points off of its benchmark Overnight Lending Rate, bringing it from 4.75% to 4.5%. This is the lowest the central bank’s rate has been since May 2023.

It’s the central bank’s second decrease since June, when it kicked off its new rate cutting cycle after an 11-month-long hold and the historic 10-part hiking cycle that took place between March 2022 and July 2023. 

Canada’s prime rate will now lower from 6.95% to 6.7%, which will directly influence variable mortgage rates and any other borrowing products that are based on prime. Those currently holding a variable-rate mortgage will see either their next monthly payment decrease in kind, or more of that payment go toward their mortgage principal balance, depending on the type of mortgage product they have.

Today’s rate cut further ushers in the BoC’s new rate cutting era, which analysts anticipate will last until 2025. It was largely expected by markets (which had priced in an 80% chance) following the most recent June inflation report, which showed the Consumer Price Index had slowed to a year-over-year growth pace of 2.7%. A similarly promising CPI report out of the United States also further cemented the likelihood of today’s cut.

Also read: US inflation falls to 3% in June. Here’s what that means for the Bank of Canada

Watch: July 24, 2024 Bank of Canada Rate Announcement

Another September rate cut is likely

Now, all eyes are on the BoC’s next rate announcement on September 4th, and whether it will pass along yet another quarter-point cut – or perhaps skip a beat. In today’s announcement, the Bank came across as dovish, noting that inflationary pressures have continued to ease, and that its preferred core measures have trended under 3% for a number of months. It now expects inflation to lower to 2.5% this year and reach its 2% target in 2025, which paves the way for additional cuts. 

However, it did acknowledge that factors such as high shelter inflation continue to push the measure up, and that they will continue to monitor progress here carefully. 

“With broad price pressures continuing to ease and inflation expected to move closer to 2%, Governing Council decided to reduce the policy interest rate by a further 25 basis points,” states the BoC’s announcement.

“Ongoing excess supply is lowering inflationary pressures. At the same time, price pressures in some important parts of the economy—notably shelter and some other services—are holding inflation up. Governing Council is carefully assessing these opposing forces on inflation. Monetary policy decisions will be guided by incoming information and our assessment of their implications for the inflation outlook. The Bank remains resolute in its commitment to restoring price stability for Canadians.”

The Bank also expressed its expectation for global GDP to expand at an annual rate of 3% through 2026, along with softening inflation in most advanced economies. It notes that growth in the US has subsided, with the Fed now gearing up to kick off its own rate cuts as early as September.

On the home front, economic growth is up 1.5% in the first half of 2024. However, the BoC points out, aggressive population growth continues to drive output faster than GDP growth, leading to “excess supply” in the economy. Combined with weaker household spending and labour markets, there are clear signs the economy is now poised for a lower rate environment.

Why is the Bank of Canada cutting rates?

The BoC uses its Overnight Lending Rate as a tool to either stimulate or restrict the economy, in efforts to keep inflation close to a target of 2%. When the economy is running hot – which it did following the end of pandemic lockdowns in 2022 – the central bank hikes this rate, which is used by Canada’s consumer banks as a benchmark for the cost of borrowing. That then makes it tougher for borrowers to get credit, and for consumers to spend, which has a cooling effect on the economy. The BoC increased its rate 10 times between March 2022 and July 2023, bringing the Overnight Lending Rate from its pandemic-era low of 0.25%, to a total of 5%.

Now, the BoC is enjoying the fruits of that labour – interest rates have been high long enough to have pulled inflation back down, and other data indicates the economy is largely slowing. That has allowed the central bank to switch gears and lower interest rates, in order to support the economy at a sustainable level.

However, it’s not all cheery news – today’s rate cut will also impact other prime-based borrowing products including Guaranteed Income Certificates and high interest savings accounts – it's’ not such a cheery message for savers, who will see their earning rate on these products decrease.

How much further will the Bank of Canada cut rates?

While no one can say for certainty where the BoC’s rate will end up, it’s largely expected by analysts that the central bank will cut by a total of 200 basis points (including the cuts made today and in June)  before it’s through with this cutting cycle. That would eventually bring the Overnight Lending Rate down to 3%, and the Prime rate to 5.2%. 

However, the Bank has made it clear that future rate cuts will remain heavily dependent on the economic data to come, and will be closely monitoring indicators such as inflation, GDP, and labour as it makes its upcoming decisions.

What does this mean for variable mortgage rates?

Those who’ve stuck it out so far with variable rates are being rewarded further today, as they’ll see their monthly payments lower again, or more of their payment go toward their principal.

Getting a variable mortgage rate today may be a great option for those who feel bullish about the Bank’s downward trajectory, and who have the financial bandwidth to absorb any surprise holds or increases in the future.

How will today’s rate cut impact fixed mortgage rates?

While fixed mortgage rates are not directly influenced by the BoC’s rate, their pricing is set according to trends in the bond market, which is very reactive to the central bank’s movements. Five-year Government of Canada bond yields had already fallen to 3.27% as of publish time following the announcement, and will likely continue to decrease.

Lower yields pave the way for further fixed rate discounts; we have already seen some lenders cut their fixed-rate options in recent days, and can expect to see more as yields continue to drop.

How does this affect me if I’m shopping or renewing my mortgage?

If you’re currently on the hunt for a new mortgage rate, or are coming up for renewal – as half of Canada’s mortgage holders will be over the next two years – a lower interest rate environment is very good news. The “best” mortgage rate for you, however, will be based on your personal risk tolerance and circumstances as a borrower.

Also read: Renewing your mortgage in 2024: Here’s what to expect

If you believe that the BoC will cut rates aggressively over the next 24 months, and can financially stomach any upward surprises, getting a variable rate now can make a lot of sense and pack a big pay-off.

For those who prefer a fixed mortgage rate also have a number of options. While many of today’s borrowers may be hesitant to lock into a five-year term when rates are poised to lower, trying out a shorter-length mortgage, such as a two-year fixed term, may provide the ideal mix of flexibility and stability. Working with a mortgage broker can help demystify which option is best for you, and help you hone your mortgage strategy as rates trend lower.

The next Bank of Canada rate announcement is scheduled for September 4, 2024.

Also read:

• Canadian CPI lowers to 2.7% in June
• Home affordability improved in June as interest rates dipped
• Rate cut leads to small June jump for national home sales
• 5 tips for mortgage renewal time
• The dos and don’ts of getting a mortgage pre-approval