How the Bank of Canada’s June 5, 2024 Rate Cut Affects You

It’s official: interest rates in Canada have started to trend lower. On June 5, the Bank of Canada lowered its benchmark policy rate by 25 basis points, marking the central bank’s first cut since the early days of the pandemic. The move lowers the overnight lending rate and the commonly referenced prime rate to 4.75% and 6.95%, respectively.

For many Canadians this rate cut will be welcome news after more than two years of rising borrowing costs. The BoC slashed rates to a record low of 0.25% in March 2020 as a response to the pandemic, then reversed course when inflation surged as economies reopened. Beginning in March 2022, the Bank raised its policy rate repeatedly and, by July 2023, the benchmark rate had risen to 5%—a level not seen in roughly two decades—before this recent easing.

Inflation and other indicators have cooled enough for the BoC to begin easing. Canada’s Consumer Price Index (CPI) was reported at 2.7% in April, and the Bank’s preferred core measures—referred to as the “median” and “trim”—also showed declines. The BoC noted that three-month measures point to continued downward momentum and that with growing evidence of easing underlying inflation, monetary policy no longer needs to be as restrictive.

“CPI inflation eased further in April, to 2.7%. The Bank’s preferred measures of core inflation also slowed and three-month measures suggest continued downward momentum… With continued evidence that underlying inflation is easing, Governing Council agreed that monetary policy no longer needs to be as restrictive and reduced the policy interest rate by 25 basis points. Recent data has increased our confidence that inflation will continue to move towards the 2% target.”

— The Bank of Canada

The rate cut has different implications depending on whether you’re borrowing, investing or saving. Below we explain the likely effects for each group.

What the BoC’s rate cut means if you’re a mortgage borrower

The most immediate beneficiaries are variable-rate mortgage holders and anyone with a home equity line of credit (HELOC). Variable mortgage pricing is tied to the overnight and prime rates, so borrowers with adjustable-rate products will generally see rates and monthly payments fall in real time. For variable mortgages with fixed payment schedules, the same payment will now apply more toward principal than interest, helping to reduce outstanding balances faster.

Variable mortgage rates will fall

Mortgage advisers point out that borrowers who stuck with variable rates through the high-rate period will now see relief. If lenders pass on the entire 25-basis-point cut, the most competitive five-year variable rates could move down a similar amount. Based on recent market calculations, a move from 5.95% to roughly 5.70% on a five-year variable could save the typical borrower around $96 per month, under the following assumptions:

• 10% down payment on the purchase
• National average home price of $703,446 (April national average, CREA)
• A five-year variable mortgage amortized over 25 years
• Total mortgage amount of approximately $652,727, equating to a monthly payment near $4,157 before the cut

Fixed mortgage rates may also decrease

Fixed mortgage rates aren’t set directly by the BoC but by the bond market. In the days leading up to the rate decision, yields on five-year Government of Canada bonds fell, easing the pricing floor lenders use for five-year fixed rates. If bond yields remain lower, lenders are likely to reduce their fixed-rate offerings as well, which could give buyers and renewers additional options at more attractive fixed terms.

If you’re currently shopping for a home

Lower rates improve mortgage affordability, but they can also spur stronger buyer demand and higher prices—especially if buyers rush into the market out of fear of missing out. That dynamic was evident during past periods of falling rates when home sales surged and prices climbed. At the same time, a single quarter-point cut is relatively modest compared with the elevated borrowing costs many households still face, so it may not immediately revive a stalled spring market. Indeed, recent data showed a slight month-to-month drop in sales activity, suggesting buyers are still cautious.

Whether lower rates reignite competition will depend on how households respond to improved affordability, whether further cuts follow, and how quickly mortgage lenders reflect the BoC’s move in their posted rates.

What the BoC rate means if you’re an investor

Rate cuts are generally supportive for equities because lower borrowing costs can improve corporate profitability and encourage risk-taking. Bond markets typically respond to cut expectations by lowering yields, which can push up prices for existing bonds.

This policy move also highlights a divergence between the Bank of Canada and the U.S. Federal Reserve. While the BoC judged that Canadian inflation has cooled enough to ease policy, the U.S. inflation path has been firmer, keeping the Fed more cautious. Differences in monetary policy between Canada and the U.S. can affect the Canadian dollar; a weaker currency could lift import prices and counteract some of the disinflationary progress made so far. Analysts note that currency movements can act like a monetary shock, and the BoC will watch exchange-rate developments when planning future cuts.

For investors with cross-border exposure, changes in the Canadian dollar matter: a weaker Loonie reduces the domestic value of U.S.-dollar assets and income when converted back to CAD.

What the BoC rate means to Canadian savers

While borrowers tend to benefit from rate cuts, savers typically see less favorable returns when policy rates fall. Interest paid on high-interest savings accounts, short-term guaranteed investment certificates (GICs) and other deposit products commonly follows the prime rate and market yields. That means the appeal of some cash products will decline as banks adjust rates downward.

Savers may want to reassess their short-term cash strategy: consider locking in competitive GIC rates if you expect further reductions, or reevaluate liquidity needs with a certified financial planner to balance safety and returns in a lower-rate environment.

Further reading about the Bank of Canada

• How the Bank of Canada’s benchmark rate affects household finances
• Bank of Canada policy decisions and the timing of rate changes
• What to expect for GIC rates during a rate-cutting cycle
• How central-bank policy can influence currency and imports
• Tools for mortgage renewals and affordability calculations