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Header The Bank of Canada just cut its lending rate Heres what that could mean for Canadians
• Sep. 4, 2024

The Bank of Canada (BoC) just announced its third rate cut this year, bringing its overnight lending rate down from 4.5% to 4.25%.

The news comes after the central bank made two back-to-back rate cuts in 2024: In June, the BoC cut its rate from 5% to 4.75%, and in July it sliced its lending rate from 4.75% to 4.5%.

According to TD Managing Director and Senior Economist Leslie Preston, this latest rate cut of 25 basis points further signals that the BoC is in a “cutting phase” as inflation and the job market are cooling. The central bank targets inflation of around 2%, and things appear to be trending in the right direction.

"Inflation is cooling in Canada. In fact, the latest data from August showed that inflation slowed further in July and put headline inflation at 2.5%. That's the lowest level since March 2021,” Preston said.

“This is exactly the kind of progress towards the 2% inflation target the Bank of Canada wants to see.”

In its decision to cut its overnight lending rate, the BoC said: "With continued easing in broad inflationary pressures, Governing Council decided to reduce the policy interest rate by a further 25 basis points. Excess supply in the economy continues to put downward pressure on inflation, while price increases in shelter and some other services are holding inflation up."

What a rate cut could mean for Canadians

The BoC’s lending rate serves as a reference point that financial institutions use to set interest rates for products such as mortgages and loans, so many Canadians have been closely watching the central bank’s moves in the hopes of seeing some rate relief.

That's because when the BoC’s overnight lending rate goes up, it is more expensive for Canadians to borrow money. And when it goes down, it becomes cheaper.

When rates fall, Canadian homeowners with variable rate mortgages who have fixed payments will see a higher proportion of their payment go towards the principal amount of their mortgage. Homeowners with variable payments will see their total payment shrink.

With this latest rate announcement, Preston said Canadians won’t necessarily see a big change in fixed mortgage rates as those are priced on government bond yields. Financial markets have been expecting the BoC to cut rates this year, and those expected cuts are already factored into bond yields, which in turn influence interest rates on fixed mortgage rates.

“Since a 25 basis points cut was what markets were expecting, this was already factored into bond yields. Therefore, we are unlikely to see much of a shift in bond yields, and fixed rate mortgages that are currently out there in the market,” Preston said.

Looking forward

There are two more scheduled BoC rate announcements this year on October 23 and December 11. Preston said TD Economics is predicting that more rate cuts are on the way.

“We are expecting that the BoC will continue this gradual pace of a quarter-point cut at every meeting through the remainder of the year,” Preston said.

TD Economics is also predicting further rate cuts into 2025. TD Economist Andrew Hencic previously told TD Stories that the central bank’s announcements are data dependent, so on top of inflation, the BoC looks at data from the job market and the overall health of the economy when making a rate decision.

“Longer-term interest rates have already come down about half a percentage point since late April,” Hencic said. “So, the market is expecting rates to come down. But I think what's more important than looking at things from a BoC meeting-by-meeting basis is to look at the totality of the TD Economics forecast. We believe the central bank's rate will be cut to below three percent by the end of next year.”

So, in other words, TD Economics is forecasting that Canadians could see the current 4.25% overnight lending rate drop to 2.50% by the end of 2025.


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