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Six in a row! The Bank of Canada announces another 0.25% reduction. What could this mean for you?
The Bank of Canada reduces policy rate by 0.25% (25 basis points “bps”).
On January 29th, 2025 the Bank of Canada announced another decrease in its overnight rate. The Bank of Canada has lowered its rate for six straight meetings, resulting in a cumulative drop of 2.00% (200bps) since early June 2024. This brings the overnight rate to 3.00% and the prime rate to 5.20%, which are now both at the lowest levels since August 2022.
These questions and more are answered in our below info guide:
What could this combined 2.00% of rate drops since June 2024 mean for you?
If you have a variable rate mortgage with adjustable payments:
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You should see a combined decrease in your payments of about $120 per $100K of mortgage depending on your amortization.
If you have a variable rate mortgage with static/non-adjustable payments:
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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:
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Your minimum payment should decrease by a combined amount of about $160 per $100K of HELOC balance.
If you have a fixed-rate mortgage:
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There is no immediate change, although it could positively impact your renewal options.
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 2.00%, it could increase your purchasing power by about 18%, all else being equal (i.e., if you were buying for $1,000,000, it’s possible you may now qualify for approximately $1,180,000).
- 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, bond yields may decrease slightly as 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, it’s likely. As of the time of writing, most economists and banks are projecting another 0.00% to 1.00% of rate reductions by the end of 2025. While the timing of future rate reductions are uncertain, most economists expect the Bank of Canada will continue on a rate cutting path.
- That being said, the Bank of Canada is currently facing a much higher level of uncertainty than usual. The Bank of Canada acknowledged that “projections in the January Monetary Policy Report (MPR) are subject to more-than-usual uncertainty because of the rapidly evolving policy landscape, particularly the threat of trade tariffs by the new administration in the United States.”
- While further rate cuts are likely, given the current level of economic uncertainty, forecasts will need to be updated and reviewed regularly given the potential for upward or downward revisions.
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?
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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, bond yields may decrease slightly as the rate cuts become more imminent.
Why Did the Bank of Canada (BoC) Lower Rates Again?
While numerous articles will be written about the December 11th 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, January 29th press release [click here]
- Bank of Canada, January 29th monetary policy report [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 inflation around 2% and the economy in excess supply, Governing Council decided to reduce the policy rate a further 25 basis points to 3%.” – BofC press release
- “Lower interest rates are boosting household spending and, in the outlook [Monetary Policy Report] published today, the economy is expected to strengthen gradually and inflation to stay close to target.” – BofC press release
- That being said, “the potential for a trade conflict triggered by new US tariffs on Canadian exports is a major uncertainty. This could be very disruptive to the Canadian economy and is clouding the economic outlook.” – Tiff Macklem opening statement
- Given the “scope and duration of a possible trade conflict are impossible to predict, the Monetary Policy Report provides a baseline forecast in the absence of new tariffs.” – BofC press release
- “US trade policy is a major source of uncertainty. We don’t know the scope of retaliatory measures or what fiscal supports will be provided. And even when we know more about what is going to happen, it will still be difficult to be precise about the economic impacts…Nevertheless, some things are clear.
– A long-lasting and broad-based trade conflict would badly hurt economic activity in Canada…
– At the same time, the higher cost of imported goods will put direct upward pressure on inflation…We have begun assessing the possible consequences of different tariff scenarios, and present an example in this Monetary Policy Report.” – Tiff Macklem opening statement
For more details about the recent Bank of Canada rate cuts, the potential mortgage impact of tariffs, 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.
