Discover how the Bank of Canada’s lower interest rate (from 4.5% to 4.25%) affects Canadians, from mortgage payments to borrowing costs. Learn what the 2024 lending rate changes mean for your financial future.
The Bank of Canada (BoC) has announced its third rate cut of the year, lowering the overnight lending rate from 4.5% to 4.25%. This move follows two previous reductions in 2024, with rates dropping from 5% to 4.75% in June, and from 4.75% to 4.5% in July.
This 25-basis-point cut signals that the BoC is in a “cutting phase” as inflation and the job market show signs of cooling. The central bank targets an inflation rate of around 2%, and current data indicates that the economy is moving towards that goal.
Inflation has been slowing in Canada. Recent data from August revealed that inflation further eased in July, bringing the headline inflation rate down to 2.5%, the lowest level since March 2021. This progress aligns with the BoC’s goal of reaching the 2% inflation target.
In announcing the rate cut, the BoC stated that “with continued easing in broad inflationary pressures, the 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 the Rate Cut Means for Canadians
The BoC’s overnight lending rate acts as a benchmark for financial institutions to set interest rates on products such as mortgages and loans. When the rate increases, borrowing costs rise, and when it decreases, borrowing becomes more affordable.
For Canadian homeowners with variable-rate mortgages, this latest rate cut means that a larger portion of their mortgage payment will go toward the principal, rather than interest. Homeowners with variable payment mortgages will see their total payment amounts decrease. However, fixed mortgage rates, which are tied to government bond yields, may not experience significant changes, as the market has already anticipated these rate cuts.
Looking Ahead: More Rate Cuts Expected
The BoC has two more scheduled rate announcements for 2024, on October 23 and December 11. Further rate cuts are expected as the central bank continues to navigate inflation and economic conditions. Forecasts suggest that additional quarter-point reductions are likely at each of these upcoming meetings.
Looking ahead to 2025, the BoC’s overnight lending rate could continue to decline, potentially falling below 3% by the end of next year.
What Should You Do Next?
With the Bank of Canada’s rate cuts influencing borrowing costs, now is an opportune time to assess how these changes could affect your personal or business finances. Whether you’re considering refinancing a mortgage, consolidating debt, or planning a business expansion, it’s crucial to navigate the shifting interest rate landscape strategically.
At IDM Chartered Professional Accountants, we’re here to help you make informed financial decisions tailored to your goals. Reach out to us today for expert guidance on leveraging a lower interest rate to your advantage. Let’s work together to position you for success in this evolving environment.
