On Wednesday, the Bank of Canada reduced its key interest rate to 4.5%, with Governor Tiff Macklem hinting at further reductions if inflation continues to decline. This move was anticipated by many economists following the easing of inflation in June. This is the central bank’s second consecutive rate cut, following a similar reduction last month, the first since March 2020. “If inflation continues to ease broadly in line with our forecast, it is reasonable to expect further cuts in our policy interest rate,” Macklem stated during the news conference. Last month, the bank decreased the key interest rate by 25 basis points to 4.75%, a shift from the previous steady rate of 5% maintained since July 2023.
The Bank of Canada initiated a series of aggressive rate hikes in April 2022 to combat high inflation. After a concerning May report showed inflation at 2.9%, doubts emerged about another rate cut in July. However, June’s 2.7% inflation reading alleviated these concerns. Earl Davis, head of fixed income and money markets at BMO Global Asset Management, remarked, “It wasn’t that much of a surprise because inflation is coming down.” He noted that weaker retail sales and impending mortgage renewals likely influenced the bank’s decision.
Governor Macklem, alongside Senior Deputy Carolyn Rogers, elaborated on the decision during the news conference. They cited an anticipated move towards the bank’s 2% inflation target, a slack labor market, and weakening economic conditions as factors in their decision. Despite this, Macklem emphasized that the bank is “not on a predetermined path” and will assess conditions “one meeting at a time.” The consecutive rate cuts have sparked optimism among prospective homeowners. Amy Grimble, an operations manager at a real estate firm in Scarborough, Ontario, expressed hope that lower rates might make home ownership more attainable. “It means that we’ll be saving a little bit per month on our mortgage,” Grimble told CBC News.
Rogers, addressing housing concerns, warned against relying solely on interest rate cuts for better housing market conditions. Rising rents, insurance, taxes, and maintenance costs continue to exert upward pressure on shelter inflation.
Economists reacted to the announcement with varied expectations. Douglas Porter, chief economist at BMO Capital Markets, noted the bank’s dovish tone, suggesting officials are increasingly concerned about the likelihood of a recession. Randall Bartlett from Desjardins echoed this sentiment, highlighting policymakers’ urgency to continue the rate-cutting cycle.
Avery Shenfeld, CIBC Capital Markets’ chief economist, now anticipates cuts in September and October. Capital Economics forecasts that the bank will cut 25 basis points at each meeting until the policy rate hits 2.5% by mid-2025, a prediction partly based on a slowdown in immigration. David Rosenberg of Rosenberg Research believes the Bank of Canada is far from done with rate reductions, expecting a steady diet of more rate relief. The central bank’s projections for economic growth in 2025 and 2026 imply that rates will need to decrease significantly more. The next interest rate decision from the Bank of Canada is scheduled for September 4. The path forward remains contingent on economic conditions and inflation trends, but the current outlook suggests a continued easing of monetary policy to support the economy.
How will these rate cuts affect mortgages?
Canadians with mortgages and those eyeing the housing market have significant decisions to make following consecutive interest rate cuts by the Bank of Canada. These cuts will immediately impact monthly mortgage payments for some Canadians, especially those with variable-rate mortgages.
“Those who are most immediately impacted are those who currently have variable-rate mortgages,” says Penelope Graham, a mortgage expert at Ratehub.ca. Homeowners with adjustable-rate mortgages will see their monthly payments decrease in line with the Bank of Canada’s decision.
Ratehub analyzed a scenario for a homeowner who put 10% down on a home valued at just under $700,000 with a five-year variable rate mortgage at 5.7%, amortized over 25 years. In this example, a homeowner with a monthly mortgage payment of $4,019 would see their mortgage rate drop to 5.45%, reducing their payments to $3,934. This equates to a $95 monthly savings or $1,140 annually.
For those with variable mortgages that have fixed payments, the amount paid each month won’t change. However, a greater portion of their payment will now go towards reducing the mortgage principal rather than covering interest charges. Other loans with variable interest rates, such as some student loans and home-equity lines of credit, will also benefit from the Bank of Canada’s recent rate cut.
On the other hand, fixed-rate mortgage holders will not see any immediate changes from the rate cut. The rates offered on new fixed-rate mortgages are tied to the bond market, meaning they will only adjust if traders believe there will be a sustained change in the Bank of Canada’s policy rate.
The recent rate cuts by the Bank of Canada provide immediate relief to many homeowners with variable-rate mortgages. However, those with fixed-rate mortgages and other fixed-interest loans will need to wait and see how the bond market responds to these changes. As always, it’s essential for homeowners and prospective buyers to stay informed and consult with mortgage experts to make the best financial decisions in this evolving landscape.