By Penelope Graham on September 4, 2024
Estimated reading time: 6 minutes

Making sense of the Bank of Canada interest rate decision on September 4, 2024

By Penelope Graham on September 4, 2024
Estimated reading time: 6 minutes

How the Bank of Canada’s third rate cut in a row will impact Canadians, and what to know whether you’re a borrower, investor or saver.

Photo by Karolina Kaboompics from Pexels

Third time’s a charm. The Bank of Canada (BoC) implemented yet another quarter-point cut to its benchmark borrowing rate today, following similar decreases in June and July. As a result, Canada’s overnight lending rate has lowered to 4.25%. The overnight rate is used as the basis for lenders’ prime rates and, by extension, variable mortgage rates. That’s now down three-quarters of a per cent from when the central bank first kicked off its cutting cycle back in June 2024. This is also the lowest the BoC’s rate has been since January 2023.

What does the rate cut mean?

The immediate impact of today’s rate cut will be interest rate relief for Canadians.

As a result of today’s rate cut, most Canadian lenders will now lower their prime rates to 6.45%, from the previous 6.7%. This in turn will cause variable-rate borrowing products, including variable-rate mortgages, to also drop, as their pricing is based on prime plus or minus a percentage. Those with home equity lines of credit (HELOCs) will also see their interest rates decrease.

Will the BoC continue to drop its rate?

Today’s quarter-point cut was widely anticipated. In fact, markets had priced in a 100% chance that it would occur. The deal for the rate cut was sealed after the latest inflation numbers trended in the direction the BoC wants: down between 2% and 3%. The July Consumer Price Index (CPI) report revealed inflation fell to 2.5%.

“As expected, inflation slowed further to 2.5% in July. The Bank’s preferred measures of core inflation averaged around 2.5% and the share of components of the consumer price index growing above 3% is roughly at its historical norm,” wrote the BoC’s Governing Council—the body that makes the central bank’s interest rate decisions—in its announcement.

The BoC also pointed out that shelter inflation—the largest contributor to the CPI—is also starting to slow. This includes mortgage interest costs (MIC), which measures the amount of interest Canadians pay on their mortgages. As a result of the previous two rate cuts, MIC dropped to 21% from 22.3% in July. That’s great news. but it also reflects just how much mortgage costs have soared for Canadians since the start of the pandemic.

In addition to inflation, the BoC also stated that recently revealed second quarter gross domestic product (GDP) numbers indicate the economy slowed in June and July. This suggests further rate cuts are to come; in fact, it’s expected the BoC will dole out two more quarter-point cuts in its October and December announcements this year, bringing the Overnight Lending Rate to 3.75%—its lowest since December 2022.

The prognosis is also looking good for 2025, should economic trends continue as the BoC expects. And we could be in store for another four cuts, totalling 1%, by the end of next year, which would bring the benchmark rate to 2.75%. That would be a low not seen since September of 2022, when the BoC increased its rate from 2.5% straight to 3.75% as part of its aggressive hiking cycle.

What does the BoC rate announcement mean to you?

What does it mean for you, your home, your finances and more? Read on.

… if you’re a Canadian with a mortgage

Renewing or borrowing, this rate cut spells relief for Canadians.

The impact on variable-rate mortgages

Today’s rate cut is music to variable mortgage holders’ ears. Variable interest rates will lower to reflect the cut, and how borrowers will be impacted will depend on the type of variable mortgage they have. Those who hold adjustable-rate variable mortgages will see their monthly payment immediately lower, while those on a fixed payment schedule will see more of their payment going towards their principal mortgage balance.

This makes variable-rate mortgages all the more attractive right now. And, if you have the right risk tolerance, the variable option may make a lot of sense, given how much lower markets expect variable rates to go, if you’re shopping for a new rate, or coming up for renewal,.

The impact on fixed-rate mortgages

Fixed mortgage rates aren’t directly mandated by the BoC’s rate changes, but they sure are influenced by them, via action in the bond market. As bond investors react very favourably to central bank rate cuts (they help improve the value of their existing bonds), they’ve piled into these investments in recent weeks, driving yields lower. That has put downward pressure on fixed mortgage rates, as lenders use yields as part of their investment mix, and as their pricing floor.

Following today’s rate cut, the yield on the Government of Canada five-year bond has dropped to the 2.8% range, and additional discounts for fixed rates are sure to be on the way. That’s great news for anyone currently looking to lock in. Check out below to see the current status of mortgage rates in Canada.

Here how the current rates are being affected:

What does this mean for the housing market?

Canada’s housing market has been largely resistant to the previous two rate cuts received this year, but perhaps this one will move the dial. With borrowing costs now a cumulative 0.75% lower, that should start to be reflected in mortgage affordability, and perhaps incentive buyers sitting on the sidelines.

But the reality remains that mortgage rates are still double than where they were two years ago, not to mention where they sat during the pandemic—a record low at 0.25%. We’ll get a better idea of how things are evolving once the latest August national real estate data is released later this month.

…if you’re an investor

With today’s rate cut so highly anticipated, stock markets haven’t moved on the news. The TSX composite saw a nice bump in the hour following the announcement to 23,139.64, following its opening at 22,986.23. However, at time of writing, it has moderated back down to 23,044.88, which is a scant change from yesterday’s close of 23,042.45.

However, in general, lower borrowing costs are good news for markets as companies benefit from cheaper debt. And, given the U.S. Federal Reserve is also gearing up to make a rate cut of its own later this month, it’s likely we’ll see another favourable market bounce.

…for your savings

Now, for the bad news. Today’s rate cut will pull down the rate of return for Canadian savers, such as those with high-interest savings accounts (HISAs) and guaranteed investment certificates (GICs). After seeing rates as high 5% during the BoC’s record-high rate hold, savers should brace to see this earning power fade, as these products are also linked to the prime rate. Some banks and fintech firms have given clients a heads-up to say their savings interest rates will be reducing, however there are still some competitive GICs rates to be locked into before those rates fall.

This article was created by a MoneySense content partner.

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.

About Penelope Graham

As director of content at Ratehub.ca, Penelope has over a decade of experience covering real estate, mortgage and personal finance. Her commentary is featured on BNN Bloomberg, CBC and The Globe and Mail.