Bank of Canada Cuts Interest Rates for the First Time Since Pandemic
The Bank of Canada (BoC), as most Finance experts had anticipated cut the interest rates, marking the first time they’ve lowered borrowing costs since the early days of COVID-19. In a move seen by many as a cautious sigh of relief, the bank trimmed the overnight rate by a quarter percentage point (a.k.a 25 basis points or 0.25%) to 4.75%, down from 5%.
This decision comes after a period of aggressive rate hikes that began in March 2022. Back then, inflation numbers were soaring due to pandemic stimulus programs and disrupted global supply chains. But according to Bank of Canada Governor Tiff Macklem, “We’ve come a long way in our fight against inflation.” He added, “Our confidence that inflation will continue to move closer to the 2% target has increased over recent months.”
Here’s a quick breakdown of the economic factors influencing the BoC’s decision:
- Inflation – April’s inflation rate dipped to 2.7%, down from 2.9% in March. This suggests underlying price pressures are easing.
- Growth – The Canadian economy grew by a slower-than-expected 1.7% in the first quarter of 2024. While not ideal, it indicates a potential “soft landing” for the economy.
- Employment – Job growth reached 90,000 in April, primarily driven by part-time positions. This, along with wage pressures easing, suggests the labor market is starting to cool down.
Canada Takes the Lead
The Bank of Canada is now the first central bank among its G7 peers to cut rates. This independence reflects Canada’s unique economic situation and flexible exchange rate. As Macklem himself stated, “We don’t need to move lock and step with the Federal Reserve…we can take decisions that are geared to what the Canadian economy needs.”
Risks Remain
Despite the positive signs, the Bank of Canada isn’t popping champagne bottles just yet. Governor Macklem warned that risks to the inflation outlook persist, including geopolitical tensions and a potential rebound in housing prices.
“Further progress in bringing down inflation is likely uneven and risks remain,” he cautioned.
The Bank is taking a wait-and-see approach, with the next rate announcement scheduled for July 24th. They’ll be closely monitoring economic data to determine if further rate cuts are warranted.
Let’s take a look at the interest rate hikes from 2020 to 2024 in the below table:
| Date Announced | Increase | New Overnight Rate |
|---|---|---|
| No Change Throughout 2020 & 2021 | – | 0.25% (maintained due to pandemic) |
| March 2, 2022 | 25 basis points | 0.50% |
| April 13, 2022 | 50 basis points | 0.75% |
| May 4, 2022 | 50 basis points | 1.25% |
| June 1, 2022 | 75 basis points | 2.00% |
| July 13, 2022 | 100 basis points | 3.00% |
| September 7, 2022 | 100 basis points | 4.00% |
| December 14, 2022 | 100 basis points | 5.00% |
| June 5, 2024 | -25 basis points | 4.75% |
Impact of Interest Rate Cut on Borrowers and Monthly Payments
The Bank of Canada’s rate cut will have varying impacts depending on the type of loan you have. Here’s a table outlining some scenarios (examples only):
| Loan Type | Impact of Rate Cut | Monthly Payment Change (Example) |
|---|---|---|
| Variable Rate Mortgage | Immediate Decrease | A borrower with a $300,000 variable-rate mortgage and a 6% interest rate could see a decrease of around $44 per month (assuming a 0.25% rate reduction).** |
| Adjustable-Rate Mortgage (ARM) | Decrease after Adjustment Period | Similar to a variable-rate mortgage, the payment will decrease after the initial fixed-rate period ends and the interest rate adjusts based on the new prime rate. |
| Fixed-Rate Mortgage (existing) | No Change | Borrowers with existing fixed-rate mortgages won’t see an immediate impact. Their interest rate and monthly payment are locked in for the term of the mortgage. |
| Fixed-Rate Mortgage (renewal) | Potentially Lower Rate at Renewal | Borrowers renewing their fixed-rate mortgage may benefit from a lower interest rate if the bank’s prime rate (which influences fixed rates) continues to decrease. |
| Line of Credit (LOC) | Potential Decrease | Interest rates on LOCs are often tied to prime rate. A decrease in prime could lead to a lower interest rate on your LOC, reducing your minimum monthly payment. |
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