Bank of Canada Rate Decision Sept 4, 2024: Market Takeaways

Third time’s a charm. The Bank of Canada (BoC) has cut its benchmark overnight lending rate by another quarter percentage point, following reductions in June and July. The overnight rate now stands at 4.25%, which serves as the foundation for lenders’ prime rates and, in turn, variable mortgage and credit products. Since the BoC began cutting rates in June 2024, the benchmark has fallen by 0.75%, and this level is the lowest for the central bank since January 2023.

What does the rate cut mean?

The immediate effect of today’s quarter-point cut is lower borrowing costs for many Canadians. Major lenders are expected to reduce their prime rates from 6.70% to roughly 6.45%, which will translate directly into lower interest rates for variable-rate products, including variable-rate mortgages and home equity lines of credit (HELOCs).

For borrowers with adjustable variable-rate mortgages, monthly payments should fall right away. For borrowers whose payments remain fixed, a larger portion of each payment will go toward principal reduction, helping to pay down the mortgage faster. HELOCs and other variable-rate credit lines will generally see their rates decline in line with prime.

Will the BoC continue to drop its rate?

This latest quarter-point reduction was widely expected and priced in by markets. The Bank’s decision followed July’s Consumer Price Index (CPI) release showing inflation slowed to 2.5%, and the BoC noted that its preferred core inflation measures averaged near that level. The central bank also pointed to a moderation in shelter inflation, which is the single largest CPI component. Mortgage interest costs (MIC) — the share of inflation attributable to mortgage interest paid by homeowners — fell to around 21% from 22.3% in July, reflecting earlier rate moves.

Recent gross domestic product (GDP) data signalled a cooling in the economy in June and July, reinforcing the case for further easing. Market estimates and central bank communications suggest the BoC could deliver additional quarter-point cuts in October and December, potentially bringing the overnight rate to about 3.75% by year-end. If economic trends follow the BoC’s expectations into 2025, more easing could follow: analysts anticipate the possibility of another series of cuts that could lower the benchmark to the mid-2% range by the end of next year.

What does the BoC rate announcement mean to you?

Below are practical implications of the latest rate cut for homeowners, investors and savers.

… if you’re a Canadian with a mortgage

Whether you are renewing, refinancing or still carrying a mortgage from previous years, this cut brings some relief.

The impact on variable-rate mortgages

Variable mortgage holders are the immediate beneficiaries. Adjustable-variable mortgages should see monthly payments fall in line with the lower prime rate. For borrowers on fixed-payment variable plans, the lower rate means more of each payment will be applied to principal, helping to reduce outstanding balances faster. Given expectations for further rate declines, the variable mortgage option may be attractive to borrowers comfortable with some interest-rate variability.

The impact on fixed-rate mortgages

Fixed mortgage rates are influenced indirectly through bond market moves. As central bank rate cuts improve the value of existing bonds, demand has pushed government bond yields lower. Recent activity pushed the five-year Government of Canada bond yield down to roughly the high 2% range, which puts downward pressure on five-year fixed mortgage rates and creates opportunities for borrowers who want to lock in a lower rate.

With fixed rates trending down, anyone shopping for a new fixed term or approaching renewal should compare offers and consider locking a competitive rate if it matches their financial plan.

What does this mean for the housing market?

Canada’s housing market has shown resilience to earlier rate cuts this year, but a cumulative 0.75% reduction in borrowing costs should begin to ease affordability pressures and may encourage some buyers who had been waiting on the sidelines. That said, mortgage rates remain substantially higher than they were two years ago and far above pandemic-era lows, when policy rates briefly touched historical lows. A clearer picture of housing activity will emerge as the latest monthly real estate statistics are released.

… if you’re an investor

Because the cut was widely anticipated, equity markets reacted modestly. The Toronto Stock Exchange (TSX) rose after the announcement — moving from an early level around 22,986 to a peak near 23,139 — and later settled in the low 23,000s, a minimal change versus the prior close. In general, lower borrowing costs tend to support equities by reducing corporate financing costs and stimulating economic activity. With the U.S. Federal Reserve also signalling potential rate reductions in the coming weeks, investors may find additional support for risk assets.

… for your savings

On the downside for savers, interest rates on high-interest savings accounts (HISAs) and many guaranteed investment certificates (GICs) are likely to drift lower following the BoC cut. At the peak of the recent high-rate cycle, some savings products offered yields near 5%; those earning opportunities will start to fade as banks and fintech firms adjust their offerings to reflect the lower prime rate. Still, there are occasional competitive GIC promotions and short-term opportunities for savers who shop carefully and act quickly before rates move down further.

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