This can be the BoC’s second consecutive “outsized” rate cut (the term is used for anything above 25 basis points), following the one in October. The bank attributed the larger cut to the indisputable fact that inflation has now fallen to its 2% goal and the economy continues to slow. Economists and credit markets had largely begun predicting the cut after the most recent gross domestic product (GDP) report. It showed the Canadian economy grew just 1% within the third quarter of 2024, below the bank’s own forecast of 1.5%. The latest November jobs report provided more reasons because the unemployment rate rose to six.8% – the best level since 2017, not including the pandemic.
The BoC also pointed to additional risk aspects, resembling a possible trade war with the US, and said it could monitor them closely. Future tariff decisions can be made “one announcement at a time.”
There could also be fewer and slower cuts
Despite these uncertainties, BoC Governor Tiff Macklem was confident that the bank’s five rate of interest cuts are effective. He also said that the BoC’s rate of interest policy now not must be so restrictive as inflation is now throughout the bank’s comfort zone. He explained within the BoC press conference: “With the key interest rate now significantly lower, we expect a more gradual approach to monetary policy if the economy broadly develops as expected.” Our decisions are informed by incoming information and our assessment of the impact on the inflation outlook.”
Overall, nevertheless, economists are still calling for the BoC to succeed in a terminal rate of interest (the underside of its rate of interest cycle) of around 2.5% within the second half of 2025. In an economic note following the rate of interest announcement, Douglas Porter, Bank of Montreal chief economist and economic director, wrote in a note“Ultimately, given the economic slowdown and the clouding trade outlook, we expect further small rate cuts in the order of 25 (basis points) in 2025, bringing the federal funds rate down to 2.50% before mid-year.” (i.e. on the low end of neutral) .”
He continued: “As the Bank notes, what is unfolding on the tariff front and Canada’s response is the biggest wild card; Suffice it to say, interest rates will fall even further if significant U.S. tariffs are imposed on Canada.”
What does it mean for you, your property, your funds and more? Read on.
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The Impact of a Mortgage on Canadians
Overall, this rate cut is sweet news for mortgage holders, whether or not they are taking out a brand new loan or searching for a mortgage extension. With the BoC cutting rates of interest by almost 2% since their peak, this takes significant pressure off the upcoming “mortgage extension cliff”. Many current mortgage holders canceled their rates at record lows in 2021 and 2022, and now in today’s much higher rate of interest environment they might have faced rising payments at renewal.
The impact on adjustable rate mortgages
Of course, the Canadians hit hardest by the speed cut are variable-rate mortgages, that are priced based on lenders’ base rates. Because Prime is predicated on the BoC’s rate of interest, variable mortgage rates rise and fall concurrently when the BoC makes a rate change.
As a results of this rate reduction, those that have a variable rate mortgage will immediately see their monthly payments lower. However, those on a variable rate of interest and glued payment plan will find that their payment stays, but a bigger portion of it goes toward the principal mortgage balance reasonably than interest costs.
Of course, the indisputable fact that rates of interest are falling makes variable mortgage rates a more attractive option than they were a couple of months ago. For a borrower with the correct risk tolerance and the patience to see rates drop further, selecting a variable could make plenty of sense when someone is within the means of purchasing their rate or seeking to renew.
