The Bank of Canada’s move to cut its overnight rate by .5%, taking it to 3.75%, was largely due to an inflation drop to 1.6% in September, a significant drop from 2.7% in June, said Bank of Canada Governor, Tiff Macklem.

“The Bank’s preferred measures of core inflation are now below 2.5%. With inflationary pressures no longer broad-based, business and consumer inflation expectations have largely normalized,” said Macklem.

“We took a bigger step today because inflation is now back to the 2% target and we want to keep it close to the target.”

Mortgage holders, those up for renewal, those seeking a new mortgage and those with lines of credit will see some relief in monthly payments.

“As a result of the rate cut, Canada’s prime rate will fall to 5.95% at most lenders. Those with variable mortgage rates will see either their monthly payments, or the portion of their payment that services interest, fall in kind,” says Penelope Graham, mortgage expert at Ratehub.ca.

“Bond markets had largely priced in the half-point cut, with five-year yields hovering around the 2.9% range in recent weeks. However, we may see downward pressure for fixed mortgage rates should yields drop in response to the bank’s announcement.”

Graham offers an example for Albertans, based on the average Alberta home price in September, per the Canadian Real Estate Association..

“According to Ratehub.ca's mortgage payment calculator, a homeowner who put a 10% downpayment on a $491,937 home with a five-year variable rate of 5.3% amortized over 25 years, a total mortgage amount of $456,468, has a monthly mortgage payment of $2,733,” she says. “With the 50-basis point rate decrease, their variable mortgage rate will decrease to 4.8% and their monthly payment will decrease to $2,603.”

“This means that the homeowner will pay $130 less per month or $1,560 less per year on their mortgage payments.”

Variable mortgage rate holders could see a payment reduction as soon as the next payment is due, depending on the lender.

“As inflation has now normalized to below the Bank of Canada’s 2% target, the central bank’s focus has now pivoted to supporting economic growth and preventing a recession,” says Graham. “The 50-basis-point cut will help accelerate rate relief for Canadian borrowers, as the overnight lending rate will now lower to 3.75%, its lowest since December 2022.”

“The half-point cut brings the cost of borrowing to just 50 basis points above the upper end of the bank’s neutral range of between 2.25% and 3.25%. As the bank will be keen to achieve this neutral rate in order to avoid a recession, this keeps the door open for another half-point cut in their December announcement.”

Several economists, including Avery Shenfeld at CIBC and Claire Fan at RBC, are predicting another .5% cut in December.

Shenfeld called Wednesday’s cut, a “no-brainer” in a note to clients, adding, “it would take a significant turn of events to stand in the way of another cut of that magnitude in December.”

In a note, Fan wrote, “The bank made the leap to cut the overnight rate by 50 bps, amid accumulating evidence that the economy and labour markets are weakening by more than what is necessary to achieve the 2% inflation target.”

“The reduction won’t be the last one,” she added. “The level of the overnight rate is still restrictive at 3.75% and the bank in the press release hinted at future rate cuts will follow to support a return to stronger GDP growth.”

“We continue to expect one more 50-bps rate cut from the bank this December to bring the overnight rate to the top end of the BoC’s estimate of its neutral range (3.25%) before a return to a more gradual pace of easing in 2025.”

In its statement on Wednesday, the bank said, “The Bank’s Governing Council has maintained that the timing and pace of further cuts will depend on the inflation outlook, and will remain data dependent in the coming months.”

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