The Bank of Canada (BoC) is scheduled to make another rate announcement on October 23, which will reveal whether the central bank is once again cutting its overnight lending rate – and by how much.
The BoC’s lending rate is used as a benchmark for the rate financial institutions charge on products such as mortgages and loans. In September, the BoC cut its lending rate by 25 basis points, taking it to 4.25%.
According to TD Economist Rishi Sondhi, it is likely the central bank will cut its rate further by 25 basis points in October, bringing it down to 4.00%.
There is, however, a chance that the BoC could cut even more, and slice its rate by 50 basis points, Sondhi said, explaining that factors such as easing inflation and a cooler job market are at play.
“We're thinking the BoC will announce a cut of 25 basis points, but it is important to note that we do recognize some chance of a 50-basis points reduction,” he said.
What a BoC rate cut could mean for Canadians
The central bank began cutting its rate this year in June, when it sat at 5.00%. If the BoC cuts again in October, it will be its fourth rate cut announcement of 2024.
When the BoC cuts its overnight lending rate, it impacts the interest rate charged by financial institutions on their financial products. When the BoC’s overnight lending rate goes up, it is generally more expensive for Canadians to borrow money. And when it goes down, it generally becomes cheaper.
This means rate cuts can help ease the burden of interest Canadians pay on things such as car loans, business loans, and mortgages.
“Households in Canada are quite highly indebted, so rate cut announcements are ‘good news stories,’” Sondhi said.
Many Canadian homeowners in particular pay close attention to BoC rate announcements.
When interest rates fall, 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.
But when it comes to fixed rate mortgages, an October rate cut won’t likely result in a substantial change in fixed mortgage rates, as they are priced based on government bond yields.
Financial markets have been expecting the BoC to cut rates throughout 2024, and those expected cuts are already factored into bond yields, which in turn affect fixed mortgage interest rates.
Will the BoC make further rate cuts in 2024?
Following the October 23 announcement, the BoC has one more meeting scheduled on December 11.
TD Economics predicts that the central bank will cut its lending rate again at that announcement.
Importantly, Sondhi said that these expected rate cuts are part of a series of cuts that will continue into 2025.
“We don't think they're going to be done by December,” he said.
“That is because interest rates at their current level, even with the rate cuts, are still a little bit punitive for the economy. And with inflation basically cooperating, we think that the BoC will want to get its lending rate to a level that is not as damaging for the economy sooner rather than later.”