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Bank of Canada Rate Cut: How It Will Impact Your Wallet

The Bank of Canada lowered its benchmark interest rate by a quarter-percentage point on Wednesday, marking a significant turning point in the central bank’s efforts to tame inflation.

The policy rate now stands at 4.75 percent after six consecutive holds in previous meetings. This key rate influences borrowing costs across Canada, affecting mortgage rates and other loans.

Homeowners with variable-rate mortgages, as well as Canadians with other debt tied to the central bank’s policy rate, will immediately see their interest rates drop by 25 basis points.

Bank of Canada Governor Tiff Macklem noted that the “considerable progress” made in taming inflation should be “welcome news” to Canadians.

“We’ve come a long way in the fight against inflation,” he said.

The Bank of Canada’s governing council is now confident enough in the cooling inflation trends that the central bank’s policy rate no longer needs to be as restrictive to restore price stability, Macklem added.

Canada is the first G7 nation to reduce interest rates amid a global effort to curb inflation. The Swiss National Bank was the first major economy to deliver rate relief in a surprise move in March, followed by the Swedish central bank in May.

Wednesday’s move was widely expected by economists and financial markets.

The rate cut comes as annual inflation has cooled significantly from the decades-highs of 2022 when the Bank of Canada’s tightening cycle began. The economy has also slowed, and the labor market has loosened over the past two years, helping to relieve price pressures.

‘Step in the Right Direction’ for Borrowers
Homeowners with variable-rate mortgages and other debt tied to the central bank’s policy rate will see their interest rates drop by 25 basis points immediately.

Variable-rate mortgage holders were hit hardest during the Bank of Canada’s rapid tightening cycle, with monthly payments increasing with the central bank’s rate hikes.

James Laird, co-CEO of Ratehub.ca, says this is a defining moment for homeowners who held onto a variable rate despite rising costs.

“For those who stuck with it, they were waiting for this day,” he tells Global News.

Ratehub calculated the impact Wednesday’s cut would have on a representative five-year variable mortgage rate of 5.95 percent taken out on a home worth roughly $700,000. That homeowner, with a mortgage of around $650,000 outstanding, would have been paying $4,157 a month on their mortgage heading into the latest rate decision.

After the cut, the homeowner’s rate would drop to 5.7 percent, reducing their monthly payments to $4,061. This results in nearly $100 less per month, or $1,152 per year, in mortgage payments.

Laird notes that variable-rate holders with a larger outstanding mortgage balance will see a more significant impact from the rate cut, while those with a smaller balance won’t notice the savings as much. Regardless, a drop in rates is good news for homeowners.

“All mortgage balances are significant. So a quarter point is going to matter in people’s pocketbooks,” Laird says.

Some variable-rate mortgage holders have fixed payments, with changes to their rate affecting how much of that monthly cost goes towards the interest or principal of a home.

Brampton, Ont., homeowner Zohaib Anjum Shaikh, who has fixed payments on his variable mortgage, told Global News that while the financial change won’t be significant, it’s still a good day for borrowers like himself.

“It’s a positive sign, but it is not a game changer. I just believe it’s a step in the right direction,” he says.

Laird says that Canadians trying to get into the housing market for the first time or homeowners up for renewal will have a difficult choice in the months ahead as they weigh variable or fixed-rate mortgages.

Variable-rate mortgages on the market today are typically higher than fixed-rate options. Laird says a homeowner choosing a variable mortgage today needs to be confident that rates will continue to decline by roughly two percentage points over the next two years to make forgoing a fixed rate worthwhile.

Where Does the Bank of Canada Go Next?
The Bank of Canada stated that the latest economic data gave policymakers more confidence that inflation would continue to decline back to the central bank’s two percent target, though it cautioned that “risks to the inflation outlook remain.”

Macklem said if home prices rise faster than the central bank expects, or if global conflicts escalate, it could affect the inflation trajectory in Canada. Policymakers are also monitoring wage growth, inflation expectations, and corporate pricing behavior as they forecast where inflation goes next.

Macklem mentioned that if inflation continues to ease, “it is reasonable to expect further cuts to our policy interest rate.” However, he added that decisions would be made “one meeting at a time.”

As the Bank of Canada expects inflation’s journey back to two percent to be “gradual,” Macklem said the pace of rate cuts would likely be similar.

In other words, Canadians should not expect the rapid tightening cycle seen on the way up to be mirrored on the way down.

The Bank of Canada’s next interest rate decision is on July 24, when it will also release new outlooks for inflation and the wider economy through its Monetary Policy Report. The central bank will review two inflation reports and two labor market surveys before making another decision next month.

Following Wednesday’s decision, financial markets priced in a 39 percent chance of another rate cut in July, according to Reuters.

Economists were divided on the likely pace of the easing cycle. BMO and TD Bank economists predict the central bank will alternate between pauses and cuts, resuming cuts in September; RBC and CIBC see another 25-basis-point cut in July.

“The first cut may not necessarily be the deepest, but it is the most significant, as it marks the official turning point after more than two years of restrictive policy,” wrote BMO chief economist Doug Porter in a note to clients Wednesday. “This is indeed likely to be the first of a series of cuts, although that series is not going to be a straight line down by any means.”

TD Bank director of economics James Orlando said that if the Bank of Canada diverges further from the U.S. Federal Reserve, which has taken a more cautious approach to cutting rates amid a stronger U.S. economy, it would “put greater pressure on the loonie over the coming months.”

However, Macklem argued that economic conditions differ on either side of the border and that the Bank of Canada does not need to move “lock and step” with its American counterpart.

“There are limits to how far we can diverge from the United States, but we’re not close to those limits,” he said.

Macklem was asked whether he was prepared to lower interest rates further at the next meeting, but he reiterated that the timing of future cuts depends on the data. He also resisted providing clearer forward guidance.

“Let’s just enjoy the moment for a little bit,” he said with a grin.

“If you want to know where we’re headed, we’re headed to two percent inflation, and the interest rates are going to be what they need to be to get us there and keep us there.”

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