Many Canadians are relieved that the Bank of Canada (BoC) cut its key interest rate to 4.5 per cent today, marking the second rate cut in a row.
On Wednesday, the bank announced it’s reducing the policy interest rate by a further 25 basis points in an effort to reach its two per cent inflation target. This cut marks the second straight decrease in the key rate, after it was reduced to 4.75 per cent in June.
“We expect inflation to moderate further, though progress over the next year will likely be uneven. This forecast reflects the opposing forces affecting inflation. The overall weakness in the economy is pulling inflation down. At the same time, price pressures and shelter and other services are holding inflation up,” Governor of the Bank of Canada Tiff Macklem said in a press conference on Wednesday.
“We are increasingly confident that the ingredients to bring inflation back to target are in place. But the push, pull of these opposing forces means the decline in inflation will likely be gradual and there could be setbacks along the way. If inflation continues to ease broadly in line with our forecast, it is reasonable to expect further cuts in our policy rate,” he continued.
READ MORE: Bank of Canada drops key interest rate. Here’s how it impacts homeowners
The BoC says economic growth picked up to about 1.5 per cent during the first half of this year. Household spending has been weak and is contributing to poor economic growth, the bank says. However, GDP growth is expected to increase in the second half of the year and through 2025.
Back in June, Canada’s annual inflation rate fell back to 2.7 per cent after increasing in May, however the bank says it hopes this will decrease to its two-per cent target by next year.
“Ongoing excess supply is lowering inflationary pressures. At the same time, price pressures in some important parts of the economy—notably shelter and some other services—are holding inflation up. Governing Council is carefully assessing these opposing forces on inflation,” the bank said.
“The Bank remains resolute in its commitment to restoring price stability for Canadians,” it added.
Online, many Canadians are happy about interest rates slowly decreasing.
“Slight relief for all in #Canada!” one X user said.
“Thank God for the big and small blessings,” another user said.
Meanwhile, others say more needs to be done to lower the interest rate faster.
“It’s not enough,” one user said.
“Should be 2% forever,” another user commented.
“While this may seem like good news, this is only a temporary relief. The BoC needs to take action to strengthen our dollar and economy,” another comment read.
HOW DOES THIS IMPACT CANADA’S HOUSING MARKET?
LowestRates.ca says a decrease of 25 basis points will lower the current prime rate from 6.95 per cent to 6.7 per cent and today’s lowest variable rates will go down to approximately 5.75 per cent.
Variable rate mortgages are tied to the prime rate and current variable rates are available at a discount of prime minus 0.95 per cent, according to LowestRates.ca.
“Given that rates have been high for an extended period of time, any decrease is welcome news,” Licensed Mortgage Broker and LowestRates.ca Expert Leah Zlatkin said in a statement on Wednesday.
“But this cut is not likely to be the one that moves the housing market in a significant way. We’ve seen a 50-basis point drop since June, but rates are still comparatively high and many potential buyers are waiting for further rate decreases to increase their buying power before they make a move,” she continued.
For instance, a homeowner with an adjustable variable-rate mortgage of six per cent on a home priced at $900,000 will have a monthly mortgage payment of approximately $4,589.
The same mortgage at 5.75 per cent will decrease monthly mortgage payments to about $4,483, a decrease of approximately $106 per month.
“Combined with the rate cut in June, this decrease will provide a bit more breathing room for homeowners with floating variable-rate mortgages,” RATESDOTCA Mortgage and Real Estate Expert Victor Tran said in a statement on Wednesday.
“However, in terms of the broader housing market, this rate cut isn’t likely to spur much activity. For many, budgets are still too tight and buyers are willing to wait. We would likely need to see another 25 to 50 basis point decrease before there is a significant uptick in sales activity,” he continued.
Tran says if the BoC continues to cut rates in September and October, the housing market will likely pick up in the fall and gain momentum in early 2025.
The next scheduled date for an interest rate decision is Sept. 4.
