What the Bank of Canada rate cut could mean for you

Key Takeaways:

• The Bank of Canada (BoC) just cut its interest rate by 25 basis points, bringing it down from 2.50% to 2.25%
• This is the second consecutive cut from the central bank as it cut its rate by 25 basis points in September
• According to TD Deputy Chief Economist Derek Burleton, this lower rate environment is likely to persist for quite some time as the economy adjusts to its new trade normal

The Bank of Canada (BoC) just announced it is cutting its interest rate by 25 basis points, bringing it down from 2.50% to 2.25%.

This is the second consecutive cut from the central bank, as the BoC also reduced its rate by 25 basis points in September.

At its October 29 announcement, Canada’s central bank said:

"With ongoing weakness in the economy and inflation expected to remain close to the 2% target, Governing Council decided to cut the policy rate by 25 basis points. If inflation and economic activity evolve broadly in line with the October projection, Governing Council sees the current policy rate at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment."

According to TD Deputy Chief Economist Derek Burleton, the BoC wanted to take out a bit more “insurance” against a weakening job market.

“The unemployment rate has been trending upwards, while the recent Bank of Canada Business Outlook Survey reported soft hiring intentions and fragile consumer sentiment,” Burleton said.

“The BoC continues to use a risk-management strategy towards interest rate setting. Although inflation has remained a bit sticky, the decision to cut again suggests that the central bank is more concerned about downside growth risks.”

What a rate cut means for Canadians

A BoC rate cut, in general, can mean interest rate relief for many Canadians.

The central bank's benchmark rate influences the interest rates banks charge on products such as mortgages, business loans, and personal loans. So, when the BoC cuts rates, it generally means consumers see lower interest rates on loans.

For Canadians with variable rate mortgages, rate cuts can mean more of their mortgage payment goes towards the principal of the mortgage, and less towards interest. Homeowners who have a variable rate mortgage with variable payments could see their total payment shrink.

For Canadians with fixed rate mortgages, a central bank rate cut does not immediately make an impact since fixed rate mortgages are commonly based on five-year bond yields.

Will the Bank of Canada cut its interest rate once more in 2025?

Burleton said that after the back-to-back rate cuts, the BoC is likely to move to the sidelines for the foreseeable future unless the job market weakens significantly further.

“The interest rate is already at the low end of the Bank of Canada's estimated neutral range,” he said.

"We don't see the unemployment rate rising a lot from current levels; that’s partly due to labour force growth and population slowing. I think some stabilizing in job market conditions will limit pressure to cut. At the same time, however, TD Economics expects the lower rate environment to persist for quite some time as the economy adjusts to its new trade normal.”