By Penelope Graham on October 23, 2024
Estimated reading time: 6 minutes

Making sense of the Bank of Canada interest rate decision on October 23, 2024

By Penelope Graham on October 23, 2024
Estimated reading time: 6 minutes

How the BoC’s half-point cut will impact Canadians, and what to know whether you’re a borrower, investor or saver.

The Bank of Canada (BoC) is picking up the pace—rate relief is on the way for Canadians. The central bank chose to slash its benchmark overnight lending rate today by 0.50%, bringing it down to 3.75% from the previous rate of 4.25%. This is the fourth time in a row the rate has been lowered, decreasing it by a cumulative 1.25% from when the BoC first kicked off its cutting cycle on June 5. Prior to this, it had sat at a peak of 5% from July 2023.

Changes to the BoC rate impacts the prime rate set by Canadian lenders, which in turn affects the pricing of variable-based borrowing products, which are based on the prime rate plus or minus a percentage. Following this most recent cut, the prime rate at most Canadian lenders will drop to 5.95% from 6.45%. What does that mean to your money and your debt? Keep reading.

The BoC is taking action with this larger-than-usual cut

When the central bank lowers its benchmark rate, it typically does so in quarter-point increments —unless there’s an economic reason for a heftier cut. Half-percentage point decreases like today’s are rare, but they do have a precedent; the last time the BoC doled out cuts of this size was back in March 2020, when it implemented three in rapid succession to support the economy amid the onset of the COVID-19 pandemic. Outside of the COVID era, today’s rate cut is the largest since March 2009.

That the BoC is once again supersizing its cuts points to concerns that the economy is slowing at a faster pace than expected. The most recent inflation report for September from Statistics Canada revealed the year-over-year inflation as measured by the Consumer Price Index (CPI) fell to 1.6%, which is below the BoC’s 2% target. That’s considered sustainable for the Canadian economy. The BoC tweaks its benchmark rate to keep it as close as possible to target. When inflation is running hot, it hikes rates to cool consumer spending and access to credit. The opposite occurs when inflation gets too soft; the BoC must ease borrowing conditions to encourage consumption, and bolster economic growth, otherwise it risks an impending recession. We’re in the latter situation right now.

Will the BoC continue to drop its rate?

Should economic data, such as inflation, GDP, and job market numbers, continue to trend as it has, additional rate cuts are a certainty, including more supersized cuts. Much will hinge on the next CPI report, due out on November 19. Should inflation remain sluggish, that increases the chances of another half-point cut in the BoC’s next rate announcement, on December 11.

The BoC is also keen to lower its rate down to “neutral” state, which is a range between 2.25% to 3.25%. This again is a rate that neither inflames or stunts economic growth, and remaining above it too long poses economic risk.

Following this rate cut today, the overnight lending rate remains 0.50% above the higher end of the neutral range. Overall, analysts think the BoC will lower its rate by another 1.75% by the end of 2025.

What does the BoC rate announcement mean to you?

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

The impact on Canadians with a mortgage

Whether you’re shopping for a brand new mortgage rate or renewing your existing term, today’s rate cut will make it slightly more affordable to do so.

The impact on variable-rate mortgages

Variable mortgage rate holders are the most heavily impacted by the October rate cut, as their mortgage payments—or the portion of their payment that services interest—will immediately decrease along with their lenders’ prime rate. These borrowers in Canada also have much to look forward to, with anticipated rate cuts on the horizon.

For those Canadians who have the risk tolerance to carry a variable mortgage rate (which can increase sharply when the BoC hikes rates), it may seem like an attractive choice. Many lenders in Canada also offer the option for variable borrowers to convert their mortgage to a fixed rate if they so choose; this can be an option for those who would rather lock into a fixed rate, but don’t want to commit for a full term as rates are poised to trend lower.

The impact on fixed-rate mortgages

Fixed mortgage rates aren’t directly influenced by what the BoC does. Rather, they take pricing direction from the bond market, which can be highly reactive to central bank moves; generally, bond yields and fixed mortgage rates tend to lower when rate cuts are passed on.

In the case of the October rate cut, however, don’t expect a drastic drop. As this cut was already well priced in by markets, yields haven’t budged following the announcement, with the five-year government bond hovering in the 2.9% range. However, yields could dip in reaction to other economic news in coming weeks, which would put downward pressure on fixed mortgage rates.

Check out the rates below to see the current status of mortgage rates in Canada. To check variable rates, simply change the “rate type” drop down menu.

What does this mean for the housing market?

It’s been a generally slow year for real estate in Canada, as buyers have grappled with a combination of high housing prices and steep interest rates. Now that the latter has started to come down, though, there are some early signs of returning buyer interest; according to the Canadian Real Estate Association (CREA), national home sales rose 6.9% year over year in September, and up 1.9% from August.

However, now that experts are predicting larger rate cuts to come, buyers may return to the sidelines for lower borrowing costs before making a move. The Canadian housing market will likely be in for a hot January 2025 or early spring season next year, once additional cuts have been made, and new mortgage qualification reforms—which have made it easier for first time and insured borrowers to buy a home—come into force.

What does the rate cut mean if you’re an investor?

Worries of a softer economy haven’t done much to bolster stocks following the BoC’s announcement. The TSX Composite was in the red by mid-afternoon at 250.45 (-1.01%).

Much of this is also influenced by the climate in the U.S. the Dow Jones Industrial Average is down sharply as U.S. Treasury yields (similar to Canadian bond yields) have been rising on election fears. That will likely have a much larger impact on bond yields in the weeks to come.

What does the rate cut mean for your savings?

Now, for the not-so-great news. Today’s hefty 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), at a faster pace. After seeing rates as high 5% during the BoC’s record-high rate hold, savers can expect to see this rate of return fall, as these products are also linked to the prime rate.

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.

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Comments Cancel reply

Claude Drought says:

October 29, 2024 at 11:42 am

One major point that I worry about is the fact that lower Canadian interest rates, especially when compared to US rates, generally mean that the Canadian dollar will fall further against the US dollar making imports more expensive and potentially increasing the inflation rate. One way or the other we will pay for Government anti business policies, excessive spending and currency creation.

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Ashraf Ali says:

December 17, 2024 at 8:40 am

Good day. Could someone tell me why banks interest are 3.5 percent and mortgage is higher than the banks

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