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Bank of Canada cuts target interest rate by 0.25% in June 2024 announcement

It’s a moment 11 months in the making. Today, the Bank of Canada lowered its trend-setting Overnight Lending Rate – which has sat at 5% since July 2023 – by a quarter of a percentage point, to 4.75%. It’s the first downward movement made to the benchmark rate, which is used to set Canada’s prime rate as well as variable mortgage and HELOC pricing, since the early days of the pandemic, when the central bank slashed it down to 0.25% as an economic safety response.

“We are now in the fourth phase of the pandemic rate policy. Phase 1 was dropping rates super aggressively; Phase 2 was increasing them dramatically to fight inflation; Phase 3 was keeping them elevated to tamp down inflation; Phase 4 is to move to a less restrictive rate policy,” says James Laird, Co-CEO of and President of CanWise mortgage lender.

“We are in a new situation now where usually if there is one rate cut, more will follow. Now, Canadians will be wondering where the Bank wants to get to and when, which will be exciting if you are a borrower.”

Canada’s prime rate will now lower from 7.2% to 6.95%. Variable mortgage borrowers and those with HELOCs, whose rates are based on Prime + or -, can expect to see their rate fluctuate in kind. There may also be some downward movement among fixed mortgage rates, as bond investors react favourably to the rate cut. 

The path to today’s cut has been paved by improving inflation; the April CPI report revealed the measure slowed to 2.7% year over year, with its “core” trim and median measures down to 2.6% and 3.2%, with three-month growth for both under the 2% mark. These are key metrics watched by the BoC in determining whether to hold, cut, or hike its rate.

“CPI inflation eased further in April, to 2.7%. The Bank’s preferred measures of core inflation also slowed and three-month measures suggest continued downward momentum.” states the BoC in their rate announcement release. “Indicators of the breadth of price increases across components of the CPI have moved down further and are near their historical average. However, shelter price inflation remains high.”

“With continued evidence that underlying inflation is easing, Governing Council agreed that monetary policy no longer needs to be as restrictive and reduced the policy interest rate by 25 basis points. Recent data has increased our confidence that inflation will continue to move towards the 2% target.” 

Watch: June 5, 2024 Bank of Canada Rate Announcement

Why does the Bank of Canada hike or cut rates?

Increasing or decreasing the benchmark cost of borrowing is a tool the central bank uses to control inflation and keep the currency stable. 

When inflation runs too hot, the BoC increases its rate, which makes it more expensive to get credit and therefore slows consumer spending. On the flip side, when the economy is struggling, the BoC lowers its rate to make credit cheaper, therefore encouraging consumer activity and stimulating the economy.

What happens now that the BoC has cut rates?

Variable rates will drop slightly

During the BoC's prolonged rate hold between March 2022 and July 2023, borrowers have had to grow accustomed to an overall higher rate environment; During these first two phases, Canadians with variable mortgages have seen their rates rise from below 1% to around 6% today. As an example, a borrower who got a variable mortgage back in 2021 at a rate of 0.89% would see their monthly payment rise by over $1,300.

Now that the BoC is moving on from its plateau phase, borrowers can expect some small relief, especially those who’ve been sticking it out in a variable mortgage rate over the course of the BoC’s hiking cycle. Today, the lowest five-year variable mortgage rate is 5.95%. Should lenders factor in the full rate cut, that could lower to 5.7%.

“If you have been riding a variable rate or have a balance on a home equity line of credit (HELOC), this is the announcement you have been waiting for,” says Laird.

“Those who have stuck with a variable rate will be really pleased this morning to see the rate they are paying finally move off a multi-decade high.” 

Today’s cut will translate to roughly $100 in monthly savings for the average borrower.

According to's mortgage payment calculator, a homeowner who put a 10% down payment on a $703,446  home with a 5-year variable rate of 5.95% amortized over 25 years (total mortgage amount of: $652,727) has a monthly mortgage payment of $4,157.

With today’s 25-basis point rate decrease and resulting rate of 5.7%, their monthly payment will fall to $4,061.

This means that the homeowner will pay $96 less per month or $1,152 less per year on their mortgage payments.

There may be cuts to come for fixed mortgage rates

While fixed mortgage rates are not directly influenced by the BoC’s rate decisions, their pricing is governed by the bond market. When bond yields lower, that gives lenders room to further discount their fixed-rate borrowing products. 

Prior to the announcement, five-year government bond yields had fallen to around 3.4% in anticipation of a cut, from the 3.6% range. This could spell fixed-rate discounts from lenders in the coming days.

“The five-year government of Canada bond yield has dropped about 30 basis points in the last week and fixed mortgage rates have not yet moved,” says Laird. “Most lenders won't change rates right ahead of a Bank of Canada announcement, but now that they’ve seen this, consumers should expect fixed rates to move lower.”

“Anyone choosing between a fixed and variable rate in the coming months will probably give variable rates a serious look now that the Bank of Canada is in a rate cutting mood.”

Impact on the housing market

Canada’s housing market has had a stagnant spring, with national sales dipping -1.7% from March to April, according to the Canadian Real Estate Association (CREA). While there is plenty of pent-up demand, potential buyers appear to be awaiting lower rates before they make a move. 

Today’s rate cut could jolt some action back into the market, though a 0.25% decrease offers little relief in terms of affordability. Borrowing costs are still high and budgets remain stretched.

However, entering a lower rate environment can have a powerful psychological effect on borrowers. As seen during the heydays of the pandemic, when record low rates fueled urgency and rampant price growth, home buyers may feel the pressure to make a move now, or miss their ideal window. Due to this, any small downward movement in mortgage rates can impact the market, in turn making it even tougher for those trying to buy a home.

“It will be interesting to see if this first 25 basis point rate cut is enough to stoke demand and cause FOMO to return in the housing market or if buyers will wait to see further rate relief,” says Laird.

“This first rate cut will cause Canadians to wonder if they can expect another one right away at the July 24 announcement.” 

In the meantime, borrowers can expect mortgage rates to lower, as well as the savings thresholds for products such as high-interest savings accounts, and investment vehicles such as GICs and RRSPs.

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Penelope Graham, Director of Content

Penelope has over a decade of experience covering real estate, mortgage, and personal finance topics and her commentary on the housing market is featured on both national and local media outlets.