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

Canadian borrowing costs are poised to dive further, as the Bank of Canada (BoC) slashed its benchmark interest rate by 50 basis points. This is the fourth consecutive decrease to the Overnight Lending Rate, which sets the floor for lenders’ prime rates, and, by extension, market-linked products including variable-rate mortgages, high-interest savings accounts, and guaranteed income certificates (GICs).

As a result, this benchmark rate is now 3.75%, a total of 125 basis points lower than its peak of 5%, where it hovered between July 2023 and June 5th of this year. As a result, the prime rate at most lenders will drop to 5.95%, with variable mortgage rates lowering in kind.

A 50-basis-point decrease hasn’t been seen since March 2020, when the BoC administered three half-point emergency rate cuts to support the economy during the onset of the COVID-19 pandemic, which brought their benchmark rate down to a record low of 0.25%.

WATCH: October 23, 2024 Bank of Canada announcement

A fully-baked in cut

That the BoC would lower its rate today was a certainty – the question was by how much. While the central bank typically sticks to quarter-point changes when moving through an easing cycle, “jumbo” or “oversized” cuts certainly do happen, especially when the BoC needs to move quickly to correct an imbalance in the economy. In fact, markets had factored in today’s 50-basis-point move with 90% certainty.

Today’s cut was sealed by the most recent Canadian inflation report, which showed the Consumer Price Index (CPI) had fallen to a year-over-year pace of 1.6% – lower than the target range of 2% that the BoC tries to maintain. This has raised concerns that the economy is softening at too-quick a pace; the most recent GDP report, which came out in late September, showed that while the measure picked up by 0.2% in July, early forecasts point to flat growth in the third quarter of the year. 

As well, the GDP-per-capita measure – which reflects the living standards of individual Canadians – has fallen for five quarters in a row, and down 0.1% in Q2 2024, according to Statistics Canada. This has led to effects of a “me-cession” among Canadians – that while the country may not technically be in a recession, individuals are certainly feeling the effects of one.

In the release that accompanied the rate announcement, the BoC notes that consumption is falling on a per-person basis and the labour market remains soft, with the unemployment rate at 6.5% in September and job creation lagging that of population growth. 

However, the central bank expects GDP growth will gradually improve as interest rates move lower, consumers spend more, and population growth slows; overall, the Bank forecasts GDP growth of 1.2% in 2024, 2.1% in 2025, and 2.3% in 2026. 

The BoC also expects that demand for real estate will rise due to lower interest rates, while businesses will get a boost from robust demand from the US.

The race to neutral

However, that economic improvement lies months ahead – and the pressure is on the BoC now to ease borrowing costs faster. Overall, it needs to bring its benchmark policy rate down to what it considers neutral – a range where the overnight lending rate neither heats or restricts the economy. According to the BoC, this neutral rate currently lies in a range of 2.25% to 3.25%. Factoring in today’s rate cut, they still have 50 basis points to go before they’ll hit this neutral range.

That’s prompted some analysts to call for even swifter action from the BoC, and not delay reaching neutral. Earlier this week, Avery Shenfeld, Chief Economist of CIBC World Markets, wrote that “there are reasons to think” that the central bank was considering a whopping 75-basis point move in today's announcement.

“If a 3.5% or lower overnight rate is appropriate for three months from now, it’s hard to see why it wouldn’t be even better to get there sooner, in order to shorten the wait for its impacts to kick in,” he stated.

Overall, money markets are calling for a total of another 75 basis-points worth of cuts by the end of the year, meaning another large cut is on the table in their upcoming December 11 announcement.

But the BoC can’t move too fast; pulling interest rates down too rapidly risks lowering the Canadian dollar against the USD, which in of itself stokes inflation. The US Federal Reserve – the American counterpart to the BoC – kicked off its own cutting cycle in September with a half-point cut, which further supports larger downward movement from the BoC – but exceeding that pace puts additional pressure on our currency.

There are also fears that cutting rates too fast could cause a frenzy in the housing market, as sidelined homebuyers clamour to make a move, potentially pushing home prices up unsustainably.

So far, though, the rate cuts that were doled out this summer have yet to meaningfully heat the housing market. Recent national and regional real estate reports have shown early signs that home buyers are starting to respond to lower interest rates, but many prospective buyers remain on the sidelines. Now, as an additional 50-basis-point cut is anticipated in December, buyers may continue the wait for lower borrowing costs before making a move. However, new mortgage policy reforms that go into effect on December 15 could prompt activity to pick up in the new year.”

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

For mortgage borrowers

The most direct impact of today’s rate cut will be felt by those with variable mortgage rates, as the prime rate will now fall to 5.95%. 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 conducted by Ratehub, as a result of today’s 50-basis-point decrease, an average variable mortgage holder would see their rate decrease to 4.8% from the previous 5.3%, and their monthly payment will drop to $3,543, compared to $3,721.

This means that the homeowner will pay $178 less per month or $2,136 less per year on their mortgage payments.

While fixed mortgage rates aren’t directly impacted by the BoC’s interest rate, they take their direction from bond yields, which can be highly reactive to central bank moves. As of publish time, the five-year Government of Canada bond yield is at 2.9%, which could put downward pressure on fixed mortgage rates.

This means those who are shopping for a mortgage or who are coming up for renewal, will have lower rate options to choose from. However, as further cuts are expected from the central bank, that can put borrowers in a tricky position timing-wise. 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 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 their fixed counterparts, the anticipated basis point cuts this year and next will significantly ease those borrowing costs in the near future, with the ability to switch to a fixed rate if desired when they feel the central bank has hit the bottom of their borrowing cycle.

How will this impact loans and investments?

If you have a variable rate personal loan, car loan, or line of credit, your borrowing rate is likely to go down, just as it will for variable mortgages. 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.

On the flip side, the returns you get from prime-based banking products such as high-interest savings accounts and guaranteed investment certificates (GICs) will almost definitely drop following this rate cut. GIC rates have decreased steadily since the BoC’s rate cutting cycle began in June, so those who have already locked in a favourable GIC rate earlier this year are in an enviable position. Given that economists expect further rate cuts well into 2025, now is still a good time to get a GIC if you want a secure investment with steady returns.

The next Bank of Canada rate announcement is scheduled for December 11, 2024.

Also read:

• Bank of Canada cuts target interest rate by 0.25% in September 2024 announcement
• Canadian GDP grows 0.2% in July, but signs point to cooling economy
• Canadian CPI falls to 1.6% in September
• US Federal Reserve ends four-year rate hold with jumbo half-point cut
• Home affordability improved in September following summer rate cuts