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• Oct. 23, 2024

Some welcome news for Canadians looking for interest rate relief: Canada’s central bank just announced its fourth rate cut this year, bringing its overnight lending rate down to 3.75% from 4.25%.

The cut of 50 basis points comes after the Bank of Canada (BoC) announced a series of 25 basis points cuts throughout this year. The latest rate cut was in September, when the central bank sliced its lending rate by 25 basis points, bringing it down to 4.25% from 4.50%.

"With inflation now back around the 2% target, Governing Council decided to reduce the policy rate by 50 basis points to support economic growth and keep inflation close to the middle of the 1% to 3% range. If the economy evolves broadly in line with our latest forecast, we expect to reduce the policy rate further," the BoC said in its October 23 announcement.

"However, the timing and pace of further reductions in the policy rate will be guided by incoming information and our assessment of its implications for the inflation outlook."

Supporting the justification for a cut, the latest inflation figures were released in mid-October, showing that inflation fell to 1.6% in September. The central bank aims to target an inflation rate of about 2%.

According to TD Economist Rishi Sondhi, this 50 basis points cut is not a surprise, as the latest inflation and labour market data supported a rate reduction of this size.

“The market was leaning towards a cut of 50 basis points,” Sondhi said. “In general, the labour market has been softening, and the icing on the cake was the latest inflation report, which was on the softer side.”

What a rate cut could mean for Canadians

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

Sondhi said rate cuts can help ease the burden of interest Canadians pay on things such as car loans, business loans, and mortgages.

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.

Homeowners, if they have a mortgage, are often directly impacted by rate announcements.

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 cut, Canadians won’t necessarily see a substantial 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 influences interest rates on fixed mortgage rates.

Looking forward

This year, the BoC has one more meeting scheduled on December 11. Sondhi said he and his colleagues predict that the central bank will cut its lending rate again at that announcement.

But it is important to note that heading into any rate announcement, the central bank looks at data, Sondhi said. On top of inflation, the BoC looks at numbers from the job market and the overall health of the economy when making a rate decision.

“The Bank of Canada’s mandate is to have inflation under control, so that’s really what they are gearing their monetary policy towards,” Sondhi said. “When looking forward to predict what the BoC might do next, we need to look at the state of the economy, the state of inflation, and how is the labour market doing.”

On top of a suspected rate cut in Decemeber, Sondhi said he expects the BoC to continue its cuts into 2025. This hopefully means more rate relief will be on the way for Canadians.

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