Another 0.50% Decrease!!

Bank of Canada reduced the overnight rate by 3.75%, bringing it from 3.75% to 3.25%. Which for most lenders will bring the Prime rate from 5.95% to 5.45%

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Now remember, this directly impacts those with a Variable/Adjustable Rate Mortgage. This does not directly impact Fixed Rates.

For Example: If you have a Home Equity Line of Credit, the rate is typically Prime + .50%. So this would bring your rate from 6.45% to 5.95%. Where if you have a Variable/Adjustable Rate Mortgage, it typically ranges from Prime - .50% to -1.10% bringing your current Rate 4.85% - 5.45% and decreasing it to 4.35% - 4.95%

What is the Bank of Canada Overnight Rate?

The overnight rate is generally the interest rate that large banks use to borrow and lend from one another in the overnight market.

The Bank of Canada holds this Key Lending rate. They might lower it to encourage borrowing and spending OR they may increase it to curb inflation and debt levels.

Major lenders typically raise their prime rate when there is a hike. Thats the number they use to set interest rates for loans and mortgages.

Unlike a fixed rate where one is locked in to their rate, those in a variable rate will be affected by these changes. Home owners with fixed rate mortgages won't be affected until they have to renew.

Should I lock into a Fixed Rate now?

Historically variable rates have shown to save you more money in the long run.

A few things you should consider before locking into a Fixed rate is:

• Are you planning to sell your home in the near future? Then we would highly recommend you stay in your variable rate mortgage.

• Can your budget handle a payment increase if rates go up?

• Will you be putting extra money down on your mortgage each month? If so, the savings from a variable rate can help you pay down your mortgage faster.

If you are considering locking in, give us a call to discuss first. We have a fun little calculator to help you forecast your savings if you decide to stay with your variable rate.

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Whats to come??

Source: First National - one of Canada's largest non-bank mortgage lenders, offering both commercial mortgages and residential mortgage solutions.

The Bank of Canada wrapped up 2024 with another reduction in its policy interest rate. This latest reduction – 50 basis points – follows four previous downward moves that started in June.

Below, we summarize the rationale for this decision, along with the Bank’s forward-looking comments.

Canadian economic performance and housing market comments

• The Canadian economy grew by 1% in the third quarter, somewhat below the Bank’s October projection, and the fourth quarter also looks weaker than projected

• Third-quarter GDP growth was weighed down by business investment, inventories and exports

• In contrast, consumer spending and housing activity both picked up, suggesting lower interest rates are beginning to boost household spending

• Historical revisions to the National Accounts have increased the level of GDP over the past three years, largely reflecting higher investment and consumption

• The unemployment rate rose to 6.8% in November as employment continued to grow more slowly than the labour force

• Wage growth showed some signs of easing, but remains elevated relative to productivity

Canadian inflation and outlook

• Inflation measured by the Consumer Price Index has been about 2% since the summer, and is expected to average close to the 2% target over the next couple of years

• Since October, the upward pressure on inflation from shelter and the downward pressure from goods prices have both moderated as expected

• Looking ahead, the GST holiday will temporarily lower inflation but that will be unwound once the GST break ends

• Measures of core inflation will be used to assess the CPI inflation trend

Global economic performance and the Canadian dollar

• The global economy is evolving largely as expected in the Bank’s October Monetary Policy Report

• The US economy continues to show broad-based strength, with robust consumption and a solid labour market

• US inflation has been holding steady, with some price pressures persisting

• In the euro area, recent indicators point to weaker growth

• In China, recent policy actions combined with strong exports are supporting growth, but household spending remains subdued

• Global financial conditions have eased and the Canadian dollar has depreciated in the face of broad-based strength in the US dollar

Summary comments

The Bank rationalized today’s decision by observing that “with inflation around 2%, the economy in excess supply, and recent indicators tilted towards softer growth than projected, Governing Council decided to reduce the policy rate by a further 50 basis points” to support growth and keep inflation close to the middle of its 1-3% target range.

Outlook

In today’s announcement, the Bank noted that “a number” of policy measures have been announced that will affect the outlook for near-term growth and inflation in Canada including reductions in targeted immigration levels. This suggests GDP growth in 2025 will be below the Bank’s October forecast.

In the Bank’s view, the effects on inflation will likely be more muted, given that lower immigration dampens both demand and supply. Other federal and provincial policies – including a temporary suspension of the GST on some consumer products, one-time payments to individuals, and changes to mortgage rules – will, in the Bank’s estimation, affect the dynamics of demand and inflation.

Going forward, the Bank said it “will look through effects that are temporary” and focus on underlying trends to guide its policy decisions.

In addition, the possibility that the incoming US administration will impose new tariffs on Canadian exports to the United States has increased uncertainty and clouded the economic outlook.

In concluding its announcement, the Bank observed that it has reduced its policy interest rate substantially since June. “Going forward, we will be evaluating the need for further reductions in the policy rate one decision at a time.”

It further noted that “our decisions will be guided by incoming information and our assessment of the implications for the inflation outlook.”

It then repeated its often-hear phrase that it is committed to maintaining price stability for Canadians by keeping inflation close to its 2% target.

Stay Tuned

Next Schedule Interest Rate announcements will be Jan 29, 2025