Bank of Canada Lowers Benchmark Interest Rate by 50 Basis Points to 3.25%
The Bank of Canada concluded 2024 with another reduction to its policy interest rate, cutting it by 50 basis points to 3.25%.
This marks the fifth rate cut since June, reflecting the Bank’s ongoing efforts to support economic growth and maintain inflation near its target range.
Below is a summary of the decision's rationale, its implications, and what it means for Canadian borrowers.
Canadian Economic Performance and Housing Market Trends
Global Economic Conditions and the Canadian Dollar
Economic Growth:
Canada’s economy grew by 1% in Q3, below the Bank’s October forecast, with Q4 growth also expected to underperform.
Sector Trends:
Business investment, inventories, and exports constrained growth, while consumer spending and housing activity gained momentum, indicating that lower interest rates are stimulating household demand.
Historical Revisions:
Adjustments to the National Accounts revealed higher GDP levels over the past three years, primarily due to stronger investment and consumption.
Labour Market: The unemployment rate rose to 6.8% in November, with employment growth lagging behind labour force expansion. Wage growth has moderated slightly but remains elevated compared to productivity gains.
Canadian Inflation and Outlook
Canadian Inflation and Outlook
Inflation Trends:
Consumer Price Index (CPI) inflation has remained near 2% since the summer, aligning with the Bank’s target. It is expected to average close to this level over the next two years.
Key Drivers:
Upward inflationary pressures from shelter costs and downward pressures from goods prices have eased as anticipated.
GST Holiday Impact:
A temporary GST holiday will lower inflation in the near term, but its effects will reverse when the measure ends. Core inflation measures will guide the Bank’s policy decisions.
Global Economic Conditions and the Canadian Dollar
Global Context:
The global economy is evolving in line with the Bank’s October outlook. The U.S. economy remains robust, while growth in the euro area is slowing, and China’s policies are supporting modest gains.
Currency Movement: The Canadian dollar has depreciated amid a strong U.S. dollar and easing global financial conditions.
What This Means for Borrowers
What This Means for Borrowers
If you have a variable-rate mortgage, the Bank of Canada’s rate reduction will likely lead to a corresponding drop in your interest rate. Banks typically adjust their Prime lending rates to match changes to the overnight rate.
Impact on Payments:
Depending on your variable-rate mortgage type and the bank holding it, your payment may automatically decrease when the Prime rate drops. For others, payments may remain the same, with more of the payment going toward the mortgage principal. This helps reduce the overall amortization period.
Fixed-Rate Mortgages:
While the overnight rate cut has an immediate effect on variable-rate interest calculations, its impact on fixed rates may take longer. Fixed mortgage rates are influenced heavily by bond markets, which don’t always move in sync with changes to the Prime lending rate.
If you have questions about how this change affects your mortgage or your options for a renewal or purchase, feel free to reach out for personalized advice!
Summary Comments
Summary Comments
The Bank of Canada justified today’s decision by noting that “with inflation around 2%, the economy in excess supply, and recent indicators pointing to weaker growth than projected, Governing Council decided to reduce the policy rate by a further 50 basis points.”
The Bank acknowledged several policy measures that could influence growth and inflation, including reduced immigration targets and changes to mortgage rules, along with temporary GST holidays.
Looking
Ahead
The Bank reiterated its commitment to price stability, emphasizing that future rate decisions will depend on incoming data and its implications for inflation trends.
The next interest rate decision is scheduled for January 29, 2025. Stay tuned for updates!
