Making sense of the Bank of Canada interest rate cut on June 5, 2024
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How the Bank of Canada’s June 5 rate cut will impact Canadians, and what to know whether you’re a borrower, investor or saver.
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How the Bank of Canada’s June 5 rate cut will impact Canadians, and what to know whether you’re a borrower, investor or saver.
It’s official: Interest rates are now trending lower in Canada. The Bank of Canada (BoC)—the central bank that sets the nation’s cost of borrowing—lowered its benchmark rate in its June 5 announcement by a quarter of a percentage point.
This means Canada’s overnight lending rate and the corresponding prime rate will fall to 4.75% and 6.95%, respectively.
Borrowers in Canada have waited a long time for today’s rate cut as it marks the first decrease to interest rates since the early days of the pandemic. The BoC slashed its rate to an all-time low of 0.25% in March 2020 as an economic safeguard.
However, that ultra-low rate environment was short-lived as COVID-19 lockdowns started to lift. Inflation soared on supply chain issues and the return of consumer spending, prompting the BoC to reverse course and kick off one of the steepest rate hiking cycles in history in March 2022. By July 2023, the benchmark rate had increased a whopping 10 times to 5%—a two decade high—where it remained until this most recent rate decision.
Now, inflation—as well as other economic factors, such as the gross domestic product (GDP)—has slowed enough to warrant the BoC to ease rates once again, with the Consumer Price Index (CPI) coming in at 2.7% in April. Other “core” measures monitored by the BoC, called the “median” and “trim,” have also decreased.
“CPI inflation eased further in April, to 2.7%. The Bank’s preferred measures of core inflation also slowed and three-month measures suggest continued downward momentum… With continued evidence that underlying inflation is easing, Governing Council agreed that monetary policy no longer needs to be as restrictive and reduced the policy interest rate by 25 basis points. Recent data has increased our confidence that inflation will continue to move towards the 2% target.”
—The Bank of Canada
Given Canadians have grappled with historically high borrowing costs for many months, it’s safe to say the rate cut will usher in some long-awaited relief for some. However, it’s not great news for everyone.
Here’s what it’ll mean for you, whether you’re a mortgage borrower, investor or saver.
Those impacted directly by the BoC’s rate cut will be variable mortgage borrowers, whose rates are directly influenced by movement to the overnight lending and prime rates.
“If you have been riding a variable rate or have a balance on a home equity line of credit (HELOC), this is the announcement you have been waiting for,” says James Laird, Co-CEO of Ratehub.ca and president of mortgage lender CanWise. (MoneySense, Ratehub.ca and CanWise are all owned by Ratehub Inc.) “Those who have stuck with a variable rate will be really pleased this morning to see the rate they are paying finally move off a multi-decade high.”
Borrowers with adjustable-rate variable mortgages or home equity lines of credit (HELOC) will see their rate and payments lower in real time. Meanwhile, those with variable rate mortgages on a fixed payment schedule will see more of their monthly payment go toward their principal mortgage amount.
Should lenders pass on the full rate cut, the lowest five-year variable rate available in Canada will decrease from 5.95% to 5.7%. According to calculations conducted by Ratehub.ca, that could save the average borrower $96 per month, assuming the following:
While fixed mortgage rates aren’t directly influenced by the BoC’s benchmark rate, their pricing is governed by the bond market. And bond investors are pleased as punch about this rate cut. Yields for five-year government of Canada bonds, which lenders use as the pricing floor for five-year fixed mortgage rates, have dropped roughly 30 basis points in the week leading up to the rate announcement. And as of June 5, they are hovering around 3.4%. Should this persist, lenders may discount their fixed mortgage rates, and they may continue to do so as long as lower-rate sentiment and yields trend lower.
Rate cuts pose an interesting catch-22 for anyone entering the housing market. On one hand, lower rates should spell improved mortgage affordability. However, as we’ve seen in rate cut eras past, they can also rapidly inflame urgency among buyers, ramp up competition in the market, and push home prices higher. For example, during the pandemic, home prices hit new records as sales surged, even in the usually-cheaper rural markets. (Check out the MoneySense list of the best places to buy real estate in Canada based on value.)
It remains to be seen whether this will unfold in the immediate future, though, as a quarter-point cut does little to offset already historically high borrowing costs. Buyer budgets remain stretched, which has led to a fairly stagnant spring market. CREA reports home sales actually fell 1.7% between March and April this year, which isn’t seasonally typical.
“It will be interesting to see if this first 25 basis point rate cut is enough to stoke demand and cause FOMO to return in the housing market or if buyers will wait to see further rate relief,” says Laird. (Read: “How much income do I need to qualify for a mortgage in Canada?”)
Check out the impact on rates today.
In general, rate cuts are good for stock markets, as lower borrowing costs boost everyone’s bottom lines. As of noon on June 5, the TSX Composite is up 124.5 points (0.57%), while bond markets are easing.
However, today’s rate cut signifies another notable milestone: the BoC has now deviated from the monetary policy of the U.S. Federal Reserve (the American central bank). Typically, the two central banks move in tandem on rate direction, given how intertwined the Canadian and U.S. economies are. Should the BoC stray too far from the U.S. Fed’s actions, it could risk shocking the Canadian currency, which in turn would drive inflation right back up.
However, the two countries are in two different places when it comes to their economic and inflationary recovery. Unlike Canada, which is seeing progress on the latter, the American CPI has remained stubbornly high at 3.4%, and posted another 0.3% monthly gain in its most recent April report. Labour numbers and GDP appear stronger south of the border. This has effectively reversed previous forecasts from multiple U.S. Fed rate cuts this year to none at all.
An economic note written by Desjardins economists declared a 10% decrease in the Canadian dollar would have roughly the same effect on the economy as a full percentage point cut. “As a result, currency depreciation can limit how much the Bank of Canada needs to ease financial conditions via rate cuts this year and next,” they write.
However, market chatter anticipates just two BoC rate cuts this year (there are four announcements left for 2024), which would lead to little price fluctuations for the two currencies. Rather, the BoC will need to factor in any downward pressure on the Loonie when setting its rate strategy.
“To account for this, we now see four Bank of Canada rate cuts this year instead of five and a somewhat slower pace to easing in 2025 as well,” continues the Desjardins report. “Make no mistake, we still expect the policy rate to fall materially from current levels as Canadian central bankers combat the effects of mortgage renewals and more muted population growth. Our new forecast simply assumes a slower pace of adjustment given the divergence in monetary policy that is likely to occur as the Fed remains on the sidelines for longer.”
A weakening Canadian currency could pose a risk to anyone who has investments or assets across the border, as they’ll be devalued by a weaker Loonie.
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While a rate cut is music to borrowers’ ears, it’s not great news for savers. As the interest rates for passive investment vehicles, such as high-interest savings accounts or guaranteed investment certificates (GIC), are also set by the prime rate, that means savers will see less of a return on their hard-won nest eggs. Now could be a good time to take advantage of savings products before those rates do start to materially decrease.
For those wondering how to best manage their savings portfolios moving forward, now can be a great time to reassess with a pro like a certified financial planner or adviser, who can offer tailored advice on where to park your cash as interest rates are set to drop.
This is an unpaid article that contains useful and relevant information. It was written by a content partner based on its expertise and edited by MoneySense.
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Finally, finally, finally, some chatter about the implications of a widening differential between the US and CA bank rates and the negative implications on the CA$, as well as re-igniting inflationary pressures for Canadians! After last week’s announcement of the 25 basis point rate decrease by the Bank of Canada, the CA$ lost almost a full cent (-1%). Further solitary rate decreases would only exacerbate the differentials and inflationary pressures. For the past few years, it’s been the Liberals fueling inflation with their out-of-control spending to buy popularity and votes. However, the Bank of Canada could change seats with the Liberals if it lowers the CA bank rate too quickly relative to the US Fed rate, thus widening the gap. A widening gap would negatively affect the CA$ which would make our imports from the US more expensive, thus re-igniting inflation upwards. To paraphrase, it’s a narrow and twisted road ahead for the Bank of Canada, and I hope they don’t go astray!
There should be an immediate rate cut to 3.5% Thousands of home owners are having to sell now because they can no longer make payments with their mortgages renewing at double and more of original payments Rents will continue to be high and higher as home owners try to establish income for affording their home A 3 bedroom home with a 1.45M line of credit is costing $8,300./month making interest payments alone homeowners need to collect minimum $2500.-$3,000./month per bedroom rented. People are becoming homeless because of high rates
Most people still cannot afford to renew at todays locked in rate and are uncomfortable knowing rates will continue to drop, but not fast enough for their survival