Key Takeaways:
- The Bank of Canada (BoC) announced on July 24, 2024 that it would be cutting its overnight lending rate to 4.5%, following a similar .25% cut in June.
- TD Economics believes the BoC is now in a “phase of rate cuts” and that the central bank will gradually reduce rates throughout 2024 and into 2025.
- The BoC's benchmark rate serves as a reference point for the interest rates that financial institutions charge to their customers on products such as mortgages and loans.
- The BoC has three more scheduled announcements for this year: September 4, October 23, and December 11.
For the second time in as many months, the Bank of Canada (BoC) cut its overnight lending rate, setting a new benchmark rate of 4.5%, further signaling that the central bank is now in what TD Economics is calling a “phase of rate cuts.”
In June, the central bank opted to slash its overnight lending rate from 5% to 4.75%, which marked the first cut since a series of rate hikes that had started in March 2022.
Because the BoC’s benchmark rate serves as a reference point for the interest rates that financial institutions charge to their customers on products such as mortgages and loans, many Canadians homeowners and homebuyers have been closely watching the central bank’s moves in the hopes of seeing rate relief on the horizon.
In its decision to cut the overnight rate to 4.5%, the BoC said: "With broad price pressures continuing to ease and inflation expected to move closer to 2%, Governing Council decided to reduce the policy interest rate by a further 25 basis points." Click here to read the full release.
According to TD Economist Andrew Hencic, the central bank felt confident that inflation had cooled sufficiently to warrant a rate cut.
“The central bank saw enough softening in the labour market and easing inflation in recent data to opt for a rate cut this month,” Hencic said.
“We expect more rate relief will be on the way, but it’s important to remember the BoC is data dependent. They’re going to make their decision on a meeting-by-meeting basis, taking in the state of the economy and inflation as data slowly rolls in. So, while we're now in the phase of rate cuts, we expect the central bank to gradually reduce interest rates into 2025.”
What a rate cut could mean for Canadians
With the BoC opting to cut its overnight rate by another quarter point, Hencic said the pricing of both variable and new fixed rate mortgages could change.
As a reminder, the BoC’s benchmark rate serves as a reference point for the interest rates that financial institutions charge to their customers on products such as mortgages and loans. That means when the lending rate goes up, it is more expensive for Canadians to borrow money. And when it goes down, it becomes cheaper.
When rates fall, Canadian homeowners with variable rate mortgages who have fixed payments will see a higher proportion of their payment go towards the principal amount on their mortgage. Homeowners with variable payments will see their total payment shrink.
And when it comes to fixed rate mortgages, any signals from the BoC on the pace of further cuts could affect bond yields and flow through to fixed mortgage rates. That means if the BoC hints at a faster clip of rate cuts, it could benefit people looking to get a fixed rate mortgage.
However, those who locked in a fixed rate mortgage during the pandemic, when interest rates were at historic lows, could renew their mortgage at a higher rate.
What’s next for the Bank of Canada
Now that the BoC has opted to cut rates in back-to-back announcements, Canadians are casting their gaze forward to the remaining three times the central back is set to update Canadians on its overnight rate this year, currently scheduled for September 4, October 23, and December 11.
Hencic said that TD Economics is predicting further rate cuts into 2025, because inflation and the job market are cooling. Recent data showed that inflation is at 2.7%, getting closer to the 2% target set by the BoC.
Hencic notes, however, that rate decisions are always a fine balancing act: cut too quickly and you risk inflation worsening; cut too slowly and you risk slowing growth more than necessary.
Plus, Hencic says the central bank’s announcements are data dependent. On top of inflation, the BoC looks at data from the job market and the overall health of the economy when making a rate decision.
“Longer-term interest rates have already come down about half a percentage point since late April,” Hencic said. “So, the market is expecting rates to come down. But I think what's more important than looking at things from a meeting-by-meeting basis is to look at the totality of the TD Economics forecast. We're looking for the central bank's policy rate to be cut below three percent by the end of next year.”
So, in other words, Canadians could see the current 4.5% overnight lending rate drop to 2.75% by the end of 2025.
“Rates are forecasted to come down,” Hencic said, “and they are expected to continue to come down as the economy gradually slows down and the labour market cools.”
For information on how to help prepare if your TD mortgage is coming up for renewal in the next 12 months, check out this article from TD Stories.
Likewise, homebuyers wanting to purchase a home and looking to understand how a rate change could impact their mortgage options can also reach out to a TD Mortgage Specialist. To learn what your mortgage payments might be, try the TD Mortgage Calculator, which can be found here.
