Making sense of the Bank of Canada's interest rate decision on September 4, 2024

What does a reduction in rate mean?

The immediate impact of today's rate cuts will be interest rate relief for Canadians.

As a result of today's rate cuts, most Canadian lenders will now drop their top rates to 6.45%, from 6.7%. This will cause variable rate lending products, including variable rate loans, to also decline, as their pricing is based on compounding the principal or minus a percentage. Those with home equity lines of credit (HELOCs) will also see their interest rates drop.

Will the BoC continue to cut its rate?

Today's quarter cut was widely expected. In fact, the markets were pricing in a 100% chance that it would happen. The rate cut deal was sealed after the latest inflation numbers trended in the BoC's desired range: down between 2% and 3%. The July Consumer Price Index (CPI) report showed that inflation dropped to 2.5%.

“As expected, inflation decreased to 2.5% in July. The Bank's preferred measures of core inflation reached 2.5% and the proportion of components of the consumer price index growing above 3% is close to its historical norm,” wrote the Governing Council of the BoC—the central bank's interest rate decision-making body—in its announcement.

The BoC also indicated that headline inflation—the largest component of the CPI—is also starting to slow. This includes the mortgage interest expense (MIC), which measures the amount of interest Canadians pay on their mortgages. As a result of the previous two rate cuts, the MIC dropped to 21% from 22.3% in July. That's good news. but it also shows how much mortgage costs have risen for Canadians since the pandemic began.

In addition to inflation, the BoC also said that the recently released second quarter gross domestic product (GDP) numbers indicated that the economy contracted in June and July. This suggests further price cuts are to come; in fact, the BoC is expected to make another two-quarter point rate cut in its October and December announcements this year, bringing the Overnight Lending Rate to 3.75%—the lowest since December 2022.

The prognosis also looks good for 2025, if economic conditions continue as the BoC expects. And we can expect four more cuts, including 1%, by the end of next year, which will bring the rate to 2.75%. That would be the lowest seen since September 2022, when the BoC raises its rate from 2.5% to 3.75% as part of its rate hike cycle.

What does the BoC rate announcement mean for you?

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

… if you are a Canadian with a mortgage

Renovation or borrowing, this rate reduces means Canadians are free.

Impact on variable rate mortgages

Today's rate cuts are music to the ears of homeowners switching. Variable interest rates will drop to reflect the cuts, and how borrowers will be affected will depend on the type of variable rate loan they have. Those with variable rate mortgages will see their monthly payment drop quickly, while those on a fixed payment schedule will see their payment increase toward their principal mortgage balance.