Bank of Canada Rate Decision: Impact of March 6, 2024

On March 6, the Bank of Canada (BoC) kept its key overnight lending rate at 5% for the fifth time in a row. For many Canadians this brings a mix of relief and frustration: relief if you hold savings or worry about higher rates, frustration if you hoped for cuts to ease borrowing costs. Here’s a clear breakdown of what the decision means for mortgages, investments, property owners and savers.

The Bank’s decision leaves the prime rate at 7.2%, the benchmark most Canadian lenders use to price variable-rate loans and lines of credit. That rate stability matters because it directly affects monthly payments on variable mortgages and other credit products offered by the Big Five banks and other financial institutions.

Economists and market analysts largely expected the BoC to pause. Lower-than-expected inflation in January 2024—2.9%—reduced immediate pressure on the central bank. Although Canadian GDP grew by 1% in the fourth quarter of 2023, overall economic momentum has been uneven, strengthening arguments that the rate-hike cycle has ended. Still, the Bank provided no timetable for future moves.

Inflation has come down decisively from its June 2022 peak of 8.1%, but the consumer price index (CPI) and core inflation measures remain above the BoC’s 2% target. Core measures, which remove the most volatile items such as housing and food, sit roughly between 3% and 3.5%. The Governing Council has said it wants to see sustained easing in core inflation before it will cut the policy rate.

What the BoC rate hold means for mortgage borrowers

Variable-rate mortgage holders are most affected by the Bank’s decision. Variable payments track the prime rate, which in turn is tied to the BoC overnight rate. During the 2022–2023 rate hiking cycle, adjustable-rate mortgage payments rose sharply—Bank of Canada research noted increases as high as roughly 70% for some borrowers—putting significant strain on household budgets.

Those on fixed-rate mortgages have also felt the impact: higher interest rates reduced the share of each payment that goes toward principal, and in some cases left borrowers facing negative amortization pressures. Today’s rate hold stops further immediate increases in variable payments, offering temporary relief. However, without a clear signal on when cuts might come, many borrowers—especially those shopping for new mortgages or approaching renewal—remain in limbo.

Fixed mortgage rates have eased somewhat recently as bond yields retreated from late-2023 highs. Insured five-year fixed offers that were above 5% at the end of 2023 have come down, with some advertised rates now near the high 4% range. Still, broader movement in mortgage pricing will depend on how quickly bond markets adjust to expectations of future BoC rate cuts.

What the BoC rate hold means for investors

Bond investors will need patience. Five-year Government of Canada yields have fluctuated around the upper 3% range this year after peaking near 4.2% in October 2023. Because the March 6 decision was largely anticipated, it did not trigger a significant drop in yields or boost in bond prices. Many market participants expect bond market improvements to align with an eventual BoC easing cycle, likely later in 2024.

Equities have shown stronger movement on rate-cut expectations. The TSX Composite recovered from lows in late 2023, with interest-rate sensitive sectors—real estate, utilities, and consumer discretionary—leading gains as investors price in a slower pace of policy tightening and a potential shift to easing later in the year.

What the BoC rate hold means for property investors

Property investors and landlords have faced a difficult two-year stretch. Rising rates pushed up financing costs for new builds, construction loans and purchases of second properties, while tighter lending standards increased appraisal and financing risk. A sustained decline in interest rates would relieve financing pressures for developers and investors and improve cash flow for income properties.

Until the Bank signals a clear move to lower rates, property investors should plan for continued elevated borrowing costs and ongoing scrutiny from lenders on valuations and project feasibility.

What the BoC rate hold means for Canadians’ savings

Higher interest rates over the past two years improved returns on low-risk savings vehicles. For many Canadians it became practical to earn meaningful interest in high-interest savings accounts and guaranteed investment certificates (GICs) without taking on the risks of equities. Some GICs and savings offers approached the mid-single-digit range, a notable change from the low-rate environment of earlier years.

That benefit may be temporary. Financial institutions are typically slow to raise deposit rates further but quick to reduce them when the BoC begins cutting. Savers should monitor market offers, compare rates and consider laddering GICs or using flexible savings accounts to manage interest-rate risk as policy evolves.

Read more about the Bank of Canada:

• How the Bank of Canada’s benchmark rate impacts your finances
• Bank of Canada holds key rate steady at 5%, says too early to cut
• What to expect for GICs in 2024
• What would a central bank digital currency mean for Canada? We ask 5 experts