Bank of Canada cuts target interest rate by 0.5% in December 2024 announcement

The Bank of Canada (BoC) has slashed its trend-setting interest rate for the fifth time in a row, bringing the benchmark cost of borrowing down by half a percentage point, to 3.25%. This is the lowest the rate has been since September 2022; as a result, the Prime rate used by lenders to price their variable borrowing products will lower to 5.45%, meaning variable mortgage rates will also decrease. It is the second 50-basis-point cut in a row, following the one passed down by the Bank in October.

Overall, the BoC’s Overnight Lending Rate has fallen 175 basis points from June, when it first kicked off its cutting cycle. This will spell additional relief for borrowers, who’ve been contending with historically high rates over the past two years; the BoC aggressively hiked its rate a total of 10 times between March 2022 and July 2023 in efforts to reign in inflation growth. During that time frame, its benchmark rate soared from its pandemic-era low of 0.25% to 5%.

A widely-expected half-point cut

Today’s half-point decrease was widely anticipated by economists and markets, which had forecasted it with an 88% likelihood. The expectation that a larger cut was coming first started to brew when the September GDP report was released; the data showed Canada’s economy had grown just 0.1% that month, and a total of 1% over the entire third quarter, below the BoC’s own forecast of 1.5%.

Especially telling was the per-capital GDP number,  which measures how individual Canadians are affected by the economy. It fell for the sixth consecutive quarter, indicating consumers are indeed feeling the effects of a recession, even if Canada isn’t officially defined to be in one. Expectations were then sealed by the latest  jobs report, which showed the unemployment rate in Canada has ticked up to 6.8% – its highest since 2017, outside of the pandemic years.

All of these factors – combined with the fact that inflation remains within the BoC’s 2% target – provided incentive for the central bank to be more aggressive with its rate cuts, to prevent the economy from cooling too quickly.

In the announcement accompanying the rate decision, the BoC acknowledged these uncertainties, along with the potential effects of new mortgage rules and upcoming GST holiday, and confirmed it will weigh how they evolve, while making their future rate decisions “one announcement at a time.”

Slower, fewer cuts may be coming

The Bank also hinted that it may slow the pace of cuts moving forward, given its policy rate is now 175 basis points below where it started in June, and those cuts are still working their way through the economy. It now expects that inflation will remain close to its 2% target over the next few years, as shelter costs lower due to dropping mortgage rates, and price growth for goods is starting to ease.

This could mean fewer or smaller rate cuts in 2025, though this will depend on how the economy evolves in the coming months.

In a published script for the press conference following the announcement, BoC Governor Tiff Macklem stated, “The Governing Council has reduced the policy rate substantially since June, and those cuts will be working their way through the economy. Going forward, we will be evaluating the need for further reductions in the policy rate one decision at a time.”

“In other words, with the policy rate now substantially lower, we anticipate a more gradual approach to monetary policy if the economy evolves broadly as expected. Our decisions will be guided by incoming information and our assessment of the implications for the inflation outlook.”

US tariff threats, Federal Reserve, raise further rate doubts

Of course, there’s a number of outside factors worrying rate policymakers – namely economic uncertainty coming out of the United States. Threats of aggressive US tariffs on Canadian imports and a resulting trade war would have deep implications for Canada’s economy, and would push inflation rapidly higher. 

As well, doubts are growing that the US Federal Reserve – the BoC’s American counterpart – will need to cut its own benchmark rate as much as originally expected. This is due to sticky US inflation – which rose to 2.7% in November, following October’s 2.6% reading – and a resilient job market. This poses a few issues for Canada’s central bank; the two institutions tend to move in lockstep with each other on monetary policy. Should Canada’s benchmark interest rate fall too far below the US’s Federal Funds Rate, that will further weaken the loonie, and can be inflationary on its own. The next US Federal Reserve rate announcement is scheduled for December 18, where it is largely expected to cut by 0.25%.

What does today’s Bank of Canada cut mean for mortgage borrowers?

Those most directly affected by the BoC’s rate cut will be variable mortgage holders; with the prime rate at most lenders dropping down to 5.45%, mortgage rates will lower in tandem. For those with an adjustable variable-rate mortgage, your next payment amount will be lower to reflect this latest decrease. If you’ve got a variable-rate mortgage with a fixed payment schedule, you’ll see more of your payment now going toward your principal balance, with less paying interest.

According to calculations conducted by Ratehub, as a result of today’s 50-basis-point decrease, an average variable mortgage holder would see their rate decrease to 4.35% from the previous 4.85%, and their monthly payment will drop to $3,522, compared to $3,702.

This means that the homeowner will pay $180 less per month or $2,160 less per year on their mortgage payments.

Fixed mortgage rate pricing isn’t directly affected by the BoC’s moves, but bond yields – which lenders use as the floor for their fixed-rate products – do react to rate announcements. The government of Canada five-year yield, which generally sets the cost of five-year fixed mortgage rates, had already dropped to 2.8% prior to the BoC’s announcement. Given yields have slowly eased over the course of the week, lenders will likely discount their fixed mortgage rates in the coming days.

If you’re renewing your mortgage

Today’s rate cut is also great news for existing borrowers who are coming up for renewal this year and next, as it will translate into lower renewal mortgage rates to choose from. Combined with recent rule changes that removed the mortgage stress test for borrowers making a straight switch to a new bank at renewal time, this offers a great opportunity to find a more competitive rate and save money over the course of your mortgage. However, it can be tricky to time the market; given there’s several more rate cuts expected in 2025, borrowers don’t necessarily want to lock in now and miss out on a future lower rate environment. 

It’s a good idea to get a rate hold today, which will guarantee you the lowest rate you qualify for for up to 120 days, even if interest rates rise unexpectedly during that time period.

Another popular option for borrowers is to take out a variable mortgage rate now, with the option to convert that rate into a fixed option later on if they so choose. While variable mortgage rates are currently priced higher than fixed rates, those with the risk tolerance may find it pays off once the BoC hits the bottom of its cutting cycle.

How will this impact loans and investments?

Today’s rate cut will also be positive for those with other forms of debt. Those with personal loans, car loans, or lines of credit – which are variable-rate products and based on the BoC’s rate – may see their borrowing rate go down. Depending on the terms of your loan, you may be able to reduce your repayment amounts, or you could pay off your loan more quickly as more of each payment goes towards the principal instead of interest.

However, it’s not such a cheery situation for those with prime-based banking products such as high-interest savings accounts and guaranteed investment certificates (GICs) – the rate of return on these products will decrease following this rate cut. However, GIC rates have decreased steadily since the BoC’s rate cutting cycle began in June, so those who have already locked in will still enjoy a favourable GIC rate for the time being, and there’s still a good opportunity to get a good rate on these products before rates fall further next year.

The next Bank of Canada rate announcement is scheduled for January 29, 2025.

Also read:

• How will a second Donald Trump term impact the Canadian economy?
• Canadian inflation rises to 2% in October, won’t derail rate cuts
• US Federal Reserve cuts rates by 0.25% in November announcement