Bank of Canada’s Rate Cuts: More to Come?

The Bank of Canada recently lowered its benchmark rate by 25 basis points, the first cut in over four years, bringing the trendsetting rate down to 4.75%. This move has left the door wide open for further cuts, potentially as soon as July, according to Doug Porter, Chief Economist at BMO. While this could signify a gradual decrease in rates over the coming months, it’s important to temper expectations. The central bank’s approach appears to be cautious, and any significant rate drops may take time to materialize.

Impact of US Federal Reserve on Canadian Rates

The US Federal Reserve’s cautious stance on rate cuts is expected to influence Canadian fixed mortgage rates in the short-to-medium term. With the Fed planning just one rate cut for the remainder of the year, Canadian borrowers with upcoming fixed-rate mortgage renewals might not see a dramatic drop in rates. Financial advisor Justin Prasad emphasizes that while variable rates might gradually decrease, fixed-rate options might still be preferable for many borrowers in the current economic climate.

Fixed vs. Variable Mortgages: Borrower Preferences

Following the Bank of Canada’s recent rate cut, variable rates have seen a slight decrease. However, the appeal of variable-rate mortgages remains limited due to the minimal discounts available. Fixed-term options, continue to be popular as they offer stability amidst economic uncertainty. Borrowers should consider their individual financial situations and consult with their lenders to determine the best mortgage type for their needs.

Inflation’s Unexpected Rise and Its Implications

Recent data from Statistics Canada revealed an unexpected increase in the annual inflation rate for May, reaching 2.9%. This uptick has cast some doubt on the likelihood of a July rate cut. However, BMO’s Doug Porter suggests that a rate cut remains a possibility, depending on upcoming inflation readings. The Bank of Canada’s cautious stance means homeowners should prepare for a potentially unpredictable second half of the year.

Challenges Ahead for Mortgage Renewals

Deloitte Canada’s latest economic outlook predicts further rate cuts in 2025, but many homeowners will still face challenges with upcoming mortgage renewals. While rate cuts are expected to provide some relief, the impact of higher rates during the pandemic continues to affect many households. Deloitte forecasts a gradual decline in rates, with the Bank of Canada’s benchmark rate expected to drop to 2.75% by the end of next year.

Residential Market Commentary: July Rate Cut Unlikely

Recent economic reports, including a rise in headline inflation to 2.9% and a 0.3% GDP growth in April, suggest that another rate cut by the Bank of Canada in July is unlikely. Most analysts now anticipate the next rate cut to occur in September. Homeowners and potential buyers should stay informed and be prepared for continued economic fluctuations.

 

Bank of Canada Cuts Interest Rates: A Significant Move

Benchmark Rate Drops for the First Time Since COVID-19

In a landmark decision, the Bank of Canada has reduced its benchmark interest rate by 25 basis points to 4.75%. This marks the first rate cut in over four years, responding to encouraging signs of easing inflation and a cooling economy. The last cut was during the onset of the COVID-19 pandemic when rates were slashed to 0.25%.

Economists had anticipated this move, especially after Canada's economy showed slower-than-expected growth in the first quarter of 2024. The Consumer Price Index (CPI) also indicated a decline, with inflation within the BoC's target range for the past four months. This reduction is seen as the first step towards further rate cuts throughout the year, with the next BoC meeting scheduled for July 24th.

 

Impact on Mortgage Holders and Borrowers

Positive News for Variable Rate Mortgages and HELOCs

The Canadian Mortgage Brokers Association of British Columbia (CMBA-BC) has welcomed this rate cut, highlighting its potential to alleviate financial pressures on mortgage holders and homebuyers. Variable Rate Mortgages and Home Equity Lines of Credit (HELOCs) will particularly benefit from this reduction, as it directly affects the prime lending rate.

Rebecca Casey, President of CMBA-BC, noted, "A rate cut is crucial to provide the first steps of relief to mortgage holders and borrowers across the province." This move comes as a response to significant declines in inflation and a slowdown in the Canadian economy, as seen in the first quarter's growth rate and the recent CPI figures.

 

Detailed Analysis: Why the Bank of Canada Made This Move

Inflation and Economic Performance

The BoC's decision was influenced by several key factors:

 

•          Inflation: The Consumer Price Index (CPI) eased to 2.7% in April, and core inflation measures showed continued downward momentum.

 

•          Economic Growth: The economy grew by 1.7% in the first quarter, slower than anticipated, with weak inventory investment dampening activity.

 

•          Housing Market: Despite the overall economic slowdown, housing activity and business investments have seen a gradual increase.

 

•          Labour Market: Employment growth has slowed, and wage pressures are gradually moderating.

Globally, economic performance varied, with slower growth in the U.S. and stronger activity in the Euro area and China. The BoC remains focused on ensuring price stability while navigating these economic shifts.

 

Response from Major Lenders

Lowering Prime Rates

Following the BoC's lead, major Canadian banks, including BMO, CIBC, RBC, Scotiabank, TD Bank, Desjardins Group, and Laurentian Bank, have reduced their prime lending rates by 25 basis points to 6.95%, effective June 6th. This reduction directly impacts borrowing costs for products like variable-rate mortgages and lines of credit, providing further relief to borrowers.

 

Looking Ahead

The Bank of Canada has signaled that while this rate cut is a positive step, further reductions will be gradual. This opens up the potential for a significant gradual drop in rates before the end of 2024. Porter believes there is a very real possibility of a follow-up cut in July, potentially resulting in a full percentage point reduction by the end of the year.

This is an encouraging sign for mortgage holders and prospective homebuyers, as further rate cuts could lead to even more favorable borrowing conditions.

 

What's Next?

The Bank of Canada is scheduled to meet four more times before the end of 2024, with the next decision due on July 24. All eyes will be on these meetings to gauge the central bank's future actions and their impact on the financial landscape.