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Three in a row! The Bank of Canada announces another 0.25% reduction. What could this mean for you?

Three in a row! As widely anticipated, the Bank of Canada announced another 0.25% rate reduction resulting in a cumulative drop of 0.75% since early June 2024. This brings the overnight rate to 4.25% and the prime rate is 6.45%, which are now at the lowest levels since December 2022.

What could this combined 0.75% of rate drops since June 2024 mean for you? (We love good news!)

Why did the Bank of Canada lower rates? (hint: deflating inflation)

How low can they go? (Possibly a further 1.25% to 1.75% by the end of 2025, but….)

These questions and more are answered in our below info guide:

What Does This Rate Drop Mean For You?

If you have a variable rate mortgage with adjustable payments:

  • You should see a combined decrease in your payments of about $45 per $100K of mortgage depending on your amortization.

If you have a variable rate mortgage with static/non-adjustable payments:

  • The interest portion will continue to decrease, and more of the payment will go towards the principal (unless you remain above your trigger point).

If you have a home equity line of credit:

  • Your minimum payment should decrease by a combined amount of about $60 per $100K of HELOC balance.

If you have a fixed-rate mortgage:

  • There is no immediate change, although it could positively impact your renewal

If you are currently shopping for a home or have a pre-approval:

  • Your buying power may have increased. If your approval rate is reduced by 0.75%, it could increase your purchasing power by about 7.5%, all else being equal (i.e., if you were buying for $1,000,000, it’s possible you may now qualify for approximately $1,075,000).
  • What if you have a fixed rate pre-approval? As fixed rates typically move in tandem with bond yields (which move in anticipation of a Bank of Canada rate change), the recent rate drops by the Bank of Canada were already priced in most fixed rates. That being said, if we see a continued expectation of further rate reductions, expect bond yields to gradually decrease as the rate cuts become more imminent.

What Does This Rate Drop Mean For You In The Longer Term?

Are more rate cuts expected?

  • The short answer? Yes, very likely. As of the time of writing, most economists and banks are projecting another 1.25% to 1.75% of rate reductions by the end of 2025. While the timing of future rate reductions are uncertain, if inflation continues to ease, the Bank of Canada is expected to continue on a rate cutting path through the remainder of 2024 and 2025.
  • For reference, the Bank of Canada defines an overnight rate of between 2.25% to 3.25% as the “neutral rate” for the economy (i.e., an overnight rate that is neither expansionary nor contractionary for the economy). Given that the current overnight rate is 4.25%, there is potentially another 1.00% to 2.00% of rate reductions to go, to bring the overnight rate into neutral territory

Fixed or Variable?

  • As the overnight rate (and prime rate) drops, the potential attractiveness of a variable vs. fixed rate product may grow.
  • Looking to weigh your options? At Outline Financial, we have developed a number of analysis tools to help quantify the pros, cons, costs, and benefits when comparing products. Want to compare a short vs. long term fixed rate product? Want to quantify the potential impact of taking a variable rate vs. fixed rate product given the current interest rate outlook? Please contact a member of the Outline team for a customized analysis, as we would be happy to help.

How Will This Impact Fixed Rates?

  • As mentioned above, fixed rates are heavily influenced by government bond yields. Given that bond yields move “in anticipation of” a potential Bank of Canada rate change, the most recent 0.25% rate reduction was already priced in most fixed-rate approvals. That being said, if we see a continued expectation of further rate reductions, expect bond yields to gradually decrease as the rate cuts become more imminent (this will be particularly true for shorter-term products).

Why Did the Bank of Canada Lower Rates Again?

While numerous articles will be written about the September 4th Bank of Canada rate cut, we’ve included some key takeaways below, along with links to the Bank of Canada press release, press conference, as well as the opening statement from Tiff Macklem (Governor of the Bank of Canada).

Links to the press release and opening statement:

  • Bank of Canada, September 4th press release [click here]
  • Bank of Canada, September 4th press conference video [click here]
  • Opening statement: Tiff Macklem (Governor of the Bank of Canada) [click here]

Why did the Bank of Canada decide now was the time to reduce rates?

  • “With continued easing in broad inflationary pressures, Governing Council decided to reduce the policy interest rate by a further 25 basis points.” – Bank of Canada press release
  • “Our decision reflects two main considerations. First, headline and core inflation have continued to ease as expected. Second, as inflation gets closer to target, we want to see economic growth pick up to absorb the slack in the economy so inflation returns sustainably to the 2% target.” – Tiff Macklem opening statement
  • “We are determined to get inflation down to the 2% target, and we want it to stay there. We care as much about inflation being below the target as we do above. The economy functions well when inflation is around 2%.” – Tiff Macklem opening statement

The Bank of Canada acknowledges further rate reduction may be on the way, but will take it one meeting at a time:

  • “If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts in our policy rate. We will continue to assess the opposing forces on inflation, and take our monetary policy decisions one at a time.” – Tiff Macklem opening statement.

When are the next Bank of Canada rate announcements?

  • October 23 – (Interest rate announcement and Monetary Policy Report)
  • December 11 – (Interest rate announcement)

For more details about the 0.25% Bank of Canada rate cut, or to discuss which rate or product options might be right for you, please contact a member of the Outline Financial team as we are always on standby to help.