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

The Bank of Canada (BoC) has loosened the valve on interest rates again, further easing the nation’s cost of borrowing and offering more relief to consumers and mortgage holders.

The central bank announced its third consecutive quarter-point cut to its Overnight Lending Rate, which sets lenders’ Prime rates and, by extension, variable mortgage rates. The benchmark rate is now 4.25%, from the previous 4.5%. In total, the rate has decreased by 75 basis points since the BoC kicked off its cutting cycle. Prior to that, the rate had remained at a two-decade high of 5% since July 2023.

Watch: Bank of Canada September 4, 2024 Rate Announcement

Improving inflation guaranteed today’s rate cut

That there would be a cut today was a certainty, following recent promising inflation data from both north and south of the border – exactly what the BoC is looking for when making its rate decisions. The Canadian July Consumer Price Index report showed the headline number came in at 2.5%, with slowing prices across the CPI basket of goods, including mortgage interest costs and the core measures. Expectations that the US Federal Reserve (the American counterpart to the Bank of Canada) is teeing up to start its own cutting cycle this month, further bolstered expectations of a Canadian cut today.

“As expected, inflation slowed further to 2.5% in July. The Bank’s preferred measures of core inflation averaged around 2 ½% and the share of components of the consumer price index growing above 3% is roughly at its historical norm,” stated the Bank in its announcement. “High shelter price inflation is still the biggest contributor to total inflation but is starting to slow. Inflation also remains elevated in some other services.”

“With continued easing in broad inflationary pressures, Governing Council decided to reduce the policy interest rate by a further 25 basis points. Excess supply in the economy continues to put downward pressure on inflation, while price increases in 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.”

More quarter-point cuts expected

The only thing that kept analysts guessing was the size of the rate cut; while downward movement was 100% priced in by markets, 20% thought a half-point cut might be likely. This was due to Canada’s most recent Gross Domestic Product (GDP) report, which showed that while the economy performed more strongly than expected in the second quarter of the year, the summer was largely sluggish. This has raised concerns that the BoC may need to take swifter action with its rate cuts to ensure an economic “soft landing”, without harming the labour market. These fears were initially sparked by the US’s own soft July labour market report, which prompted a stock market slide in early August.

What does today’s rate cut mean for your mortgage?

If you have a variable-rate mortgage

The prime rate at most Canadian lenders will now drop to 6.45% from the current 6.7%, and variable mortgage rates should lower in kind.

If you have an adjustable variable-rate mortgage, this means your next payment size will be lower. If you have a variable rate, but are on a fixed payment schedule, you’ll now see more of your payment go toward paying down your principal balance, and less towards interest costs.

According to calculations by Ratehub.ca, as a result of today’s rate cut, a homeowner who put a 10% down payment on a $667,317* home with a 5-year variable rate of 5.55% amortized over 25 years (total mortgage amount of: $619,203) has a monthly mortgage payment of $3,798.

With today’s 25-basis point rate decrease, their variable mortgage rate will decrease to 5.30% and their monthly payment will decrease to $3,708.

This means that the homeowner will pay $90 less per month or $1,080 less per year on their mortgage payments.

*The average home price in Canada for July 2024 (CREA)

If you have a fixed-rate mortgage

Today’s rate cut is also good news for fixed-rate mortgage borrowers; while fixed rates aren’t directly impacted by the BoC’s moves, the bond market – which lenders use as a pricing floor for their fixed borrowing products – generally reacts favourably to central bank cuts.

As of publish time, the Government of Canada five-year yield is in the 2.8% range. Fixed mortgage rates had already been trending lower as bond yields have remained in the upper 2.9 - 3% range following the August 5th market event, with the lowest five-year fixed available in Canada currently at 4.19%. Should yields continue to trend lower – a distinct possibility if upcoming inflation reports show further downward movement in the CPI – borrowers can expect to see further discounts to come.

What if I’m renewing my mortgage?

According to Mortgage Professionals Canada, 23% of Canadians expect to renew their mortgage this year, and nearly half within the next two. If you’re one of them, you’re likely wondering how today’s rate cut will impact you. It can be tricky to time when to make a move when interest rates are expected to lower further. Currently, markets are pricing in at least two more quarter-point cuts in 2024, which would bring the Overnight Lending Rate to 3.75%, and possibly another four in 2025, resulting in a benchmark of 2.75% – a low not seen since September 2022.

For those looking to make a move now, the best route is to get a rate hold for up to 120 days, which will at least guarantee access to today’s lowest rates during that time frame, even if rates unexpectedly rise. Should rates lower further, borrowers will still be able to access them. In general, those who feel confident about the BoC’s downward trajectory, and have the appropriate risk tolerance, can jump on the variable-rate train and benefit from anticipated future rate cuts.

Those who are keen to lock in, however, can explore options such as a three- or two-year fixed term, which would free them up sooner to make a change to their mortgage if need be. As always, it’s a great idea to connect with a trusted mortgage broker to assess your personal financial situation, and determine the right strategy for you. 

How will this impact the housing market?

The previous two rate cuts we received in June and July did very little to move the dial on real estate demand, as prospective home buyers wait for mortgage rates to fall further. Now that we’ve received a cumulative 75-basis-point reduction, that could start to incentivize buyers to return to the market, as we’ll certainly start to see this reflected in lower mortgage costs.

However, given there’s strong anticipation of further cuts to come, many buyers may stick it out a little longer, especially as many of Canada’s housing markets remain very well supplied, and favourable towards buyers. The next report that will provide insight on this will be the August numbers from the Canadian Real Estate Association, due out on September 16.

The next Bank of Canada announcement is scheduled for October 23, 2024.

Also read:

• July home sales fizzle as buyers await more rate cuts
• Canadian CPI lowers to 2.5% in July
• US inflation slows to 2.9% in July
• What the stock sell-off means for mortgage rates
• Q2 and June GDP surprise on the upside
• What the “me-cession” means for you – and how to ride it out
• Bank of Canada cuts target interest rate by 0.25% in July 2024 announcement
• Rate cuts improved home affordability across Canada in July