Bank of Canada cuts Policy Rate by 25 Basis Points

The Bank of Canada’s recent move to cut the policy rate by 25 basis points marks a significant step in the country’s monetary policy amidst global economic shifts. This decision, the third consecutive cut this year, brings the policy rate down to 4.25%, reflecting the central bank’s response to the current economic landscape. This is particularly pertinent given the slight increase in economic growth in Canada during the second quarter, led by government spending and business investment, which was slightly stronger than forecasted in July.

The rationale behind the rate cut is multifaceted. Primarily, it aims to stimulate economic growth by making borrowing more affordable for consumers and businesses. Lower interest rates typically encourage spending and investment, which can help boost economic activity. On the other hand, it acknowledges the need to adapt to the softening labor market and the slower pace of economic activity observed in recent months.

Moreover, the global economy’s expansion by about 2.5% in the second quarter, consistent with projections in the Bank’s July Monetary Policy Report (MPR), has been a contributing factor. However, the labor market continues to show signs of slowing, with little change in employment in recent months, despite wage growth remaining elevated relative to productivity.

The implications of this rate cut are significant for both the financial sector and the average consumer. Following the Bank’s announcement, major financial institutions such as RBC Royal Bank have adjusted their prime rates accordingly, which is expected to influence the rates applied to mortgages and other loans.

Economists had widely anticipated this move, and it aligns with the Bank’s strategy to ensure price stability and support the Canadian economy. The Bank of Canada has indicated that future monetary policy decisions will be guided by incoming data and its implications for the inflation outlook. This suggests a cautious approach, with the Bank poised to respond proactively to both domestic and international economic developments.

For homeowners with existing variable-rate mortgages, this rate cut could translate into lower monthly payments. For example, on a $100,000 mortgage, a 25-basis-point reduction could mean about $15 less in monthly payments. Therefore, on a larger scale, a $600,000 mortgage could see monthly savings of approximately $90.

Prospective homebuyers may also find more favorable borrowing conditions as a result of the rate cut. Lower mortgage rates can increase affordability, allowing buyers to qualify for larger loans or reduce the cost of borrowing.

However, it’s important to note that fixed-rate mortgages, which are more influenced by the bond market, may not see immediate changes as a result of the policy rate cut. Fixed rates tend to respond more slowly to changes in the policy rate, and their movement is also dependent on other economic factors such as inflation and growth expectations.

As the Bank of Canada continues its policy of balance sheet normalization, it remains vigilant in its assessment of the global economy’s performance. Economic growth in the United States has exceeded expectations, primarily driven by consumer spending, while the Euro-area has benefited from a surge in tourism and services, despite a downturn in manufacturing. Meanwhile, China faces challenges with weak domestic demand impacting its economic growth.

In Canada, the economy exhibited a growth of 2.1% in the second quarter, spurred by government spending and business investment. However, preliminary indicators suggest a softening of economic activity, which has been a contributing factor to the Bank’s decision to lower the policy rate. The Bank of Canada’s next scheduled interest rate announcement is set for October 23, 2024, when it will also publish its full outlook for the economy and inflation in its Monetary Policy Report.