Key Takeaways:
- The Bank of Canada (BoC) just cut its lending rate by 25 basis points, bringing it down to 2.75%
- The central bank’s lending rate influences the interest rates financial institutions charge on products such as mortgages, business loans, and personal loans
- When the BoC’s lending rate goes down, it can become cheaper to borrow money
Canada’s central bank announced it is cutting its lending rate by 25 basis points on March 12, bringing it down from 3% to 2.75%.
This is the second lending rate cut by the Bank of Canada (BoC) for 2025, as it also cut its lending rate by 25 basis points in January.
According to TD Economist Derek Burleton, this cut was largely expected due to the uncertainty in the economy following U.S.-imposed tariffs on certain Canadian exports, and the looming threat of additional ones.
"The threat of punitive U.S. tariffs has shaken confidence in Canada's economy. This will weigh on consumer spending and investment, slowing economic growth,” Burleton said. “That’s why the Bank of Canada wants to ensure the economy is prepared by giving Canadians a bit of a cushion."
In its statement on the rate cut, the BoC said: "While economic growth has come in stronger than expected, the pervasive uncertainty created by continuously changing U.S. tariff threats is restraining consumers’ spending intentions and businesses’ plans to hire and invest. Against this background, and with inflation close to the 2% target, Governing Council decided to reduce the policy rate by a further 25 basis points."
What a Bank of Canada rate cut means for Canadians
The BoC’s lending rate influences the interest rates banks charge on financial products such as mortgages, personal loans, and business loans. So, when the BoC cuts its lending rate, it can become cheaper to borrow money. And when the BoC’s lending rate goes up, it can become more expensive.
The BoC’s lending rate is important for many homeowners. When rates fall, Canadian homeowners with variable rate mortgages who have fixed payments could see a higher proportion of their payment go towards the principal amount of their mortgage. Homeowners with variable payments could see their total payment shrink.
But for Canadians with a fixed rate mortgage, a BoC rate cut does not necessarily have an immediate impact since those mortgages are typically priced on five-year government bond yields. As government yields are influenced by market predictions, the cut the BoC made today was, to some degree, already factored into bond yields.
Will the Bank of Canada announce more rate cuts in 2025?
It will be important to monitor the economic implications from threats of U.S. tariffs on Canadian exports, Burleton said.
Depending on the level and how long they are in place, tariffs can have a severe impact on Canada’s economy and job market, and Canadian retaliatory tariffs on U.S. exports will put upward pressure on inflation.
Burleton said that TD Economics predicts more rate cuts are on the way in 2025.
"We’re forecasting that the BoC’s lending rate will come down to 2.25% by the middle of the year,” he said.