Making sense of the Bank of Canada's interest rate decision on October 23, 2024

Changes in the BoC rate affect the prime rate set by Canadian lenders, which in turn affects the price of variable-based lending products, based on the prime rate plus or minus a percentage. Following these latest cuts, the prime rate for most Canadian lenders will drop to 5.95% from 6.45%. What does that mean for your money and your credit? Keep reading.

The BoC is taking action with these larger-than-usual cuts

When a central bank cuts interest rates, it usually does so in quarter-point increments—unless there is an economic reason for a major cut. The percentage is decreasing as today's are rare, but they have a precedent; the last time the BoC issued a reduction of this size was back in March 2020, when it used three in quick succession to support the economy during the onset of the COVID-19 pandemic. Excluding the COVID period, today's rate cut is the largest since March 2009.

That the BoC is once again raising its rate cuts points to concerns that the economy is slowing at a faster pace than expected. The most recent September inflation report from Statistics Canada showed that year-on-year inflation as measured by the Consumer Price Index (CPI) fell to 1.6%, below the BoC's target of 2%. That is considered stable in the Canadian economy. The BoC adjusts its stop rate to keep it as close as possible to target. When inflation runs high, it raises prices to cool consumer spending and access to debt. The opposite happens when inflation is too soft; the BoC must ease lending conditions to encourage consumption, and strengthen economic growth, otherwise it risks a further recession. We are in final mode right now.

Will the BoC continue to cut its rate?

If economic data, such as inflation, GDP, and labor market numbers, continue to trend as they are, more cuts are certain, including very large cuts. Much will depend on the next CPI report, which will be released on November 19. If inflation remains weak, that increases the chances of it decreasing by half a point at the BoC's next announcement, on December 11.

The BoC is also willing to cut its interest rate down to a “neutral” level, a range of 2.25% to 3.25%. This is also a level that does not heat up or hinder economic growth, and staying above it for a long time puts the economy at risk.

After this rate cut today, the overnight lending rate remains 0.50% above the upper limit of the neutral range. Overall, analysts think the BoC will cut its rate by another 1.75% by the end of 2025.

What does the BoC rate announcement mean for you?

What does it mean for you, your home, your finances and more? Read on.

The impact on Canadians with a mortgage

Whether you're buying a brand new home equity or renovating your existing one, today's rate cut will make it easy to do so.

Impact on variable rate mortgages

Adjustable rate mortgage holders are the most affected by October's rate cut, as their mortgage payments—or the portion of their payment that pays interest—will drop immediately along with their lender's principal amount. These borrowers in Canada also have a lot to look forward to, with rate cuts expected.