This is also the BoC’s second “oversized” (the term used for anything over 25 basis points) cut in a row, following the one in October. The Bank attributed the larger cut to the fact that inflation has now lowered to its 2% target, and the economy continues to cool. Economists and the lending markets had largely started to predict the cut following the latest gross domestic product (GDP) report. It revealed that the Canadian economy grew by just 1% during the third quarter of 2024, which was below the Bank’s own forecast of 1.5%. The most recent November jobs report provided further rationale, as the unemployment rate increased to 6.8%—its highest since 2017, not including during the pandemic.
The BoC also pointed to additional risk factors, such as a potential trade war with the U.S., and said it’ll be monitoring them closely. It will make future rate decisions “one announcement at a time.”
Fewer, slower cuts may come
Despite these uncertainties, BoC Governor Tiff Macklem expressed confidence that the five rate cuts the bank has made are working. He also said the BoC’s rate policy no longer needs to be so restrictive, given inflation is now within the bank’s comfort zone. In the BoC press conference he stated, “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.”
Overall, though, economists are still calling for the BoC to hit a terminal rate (the bottom of its rate cycle) of around 2.5% in the second half of 2025. In an economic note following the rate announcement, Douglas Porter, Bank of Montreal Chief Economist and Manager Director of Economics, wrote in a note, “Ultimately, given the slack in the economy, and the cloud over the trade outlook, we look for some further small rate trims of the 25 (basis points) variety in 2025, bringing the overnight rate down to 2.50% before mid-year (i.e., at the lower end of neutral).”
He continued: “As the Bank notes, the major wildcard is what unfolds on the tariff front, and how Canada responds; suffice it to say, rates are going lower still if broad U.S. tariffs are imposed on Canada.”
What does it mean for you, your home, your finances and more? Read on.
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The impact on Canadians with a mortgage
Overall, this rate cut is good news for mortgage borrowers, whether shopping for a new loan or coming up for mortgage renewal. Now that the BoC has lowered rates by nearly 2% since the peak, that takes significant pressure off of the incoming “mortgage renewal cliff.” Many current mortgage holders took their rates out while at record lows in 2021 and 2022, and now they would have had to face ballooning payments while renewing in today’s much higher rate environment.
The impact on variable-rate mortgages
Of course, those Canadians most directly impacted by the rate cut are those with variable-rate mortgages, which are priced based on lenders’ prime rates. As prime takes its cue from the BoC’s rate, variable mortgage rates rise and fall in tandem whenever the BoC makes a rate move.
As a result of this rate cut, those with an adjustable variable rate mortgage will see their monthly payment lower immediately. Those who have a variable rate and a fixed payment schedule, however, will see their payment remain, but more of it going toward their principal mortgage balance rather than interest costs.
Of course, the fact that rates are lowering makes variable mortgage rates a more attractive option than they were several months ago. For a borrower with the right risk tolerance, and the patience to see rates drop further, choosing variable can make a lot of sense for someone currently shopping for their rate, or coming up for renewal.
