Bank of Canada cuts key interest rate for first time in more than four years - Business News (2024)

UPDATE 8:50 a.m.

The Bank of Canada has lowered its key interest rate by a quarter of a percentage point to 4.75 per cent. Here's what it could mean for your finances.

What does it mean for consumers and prime rates?

The Bank of Canada's benchmark rate affects borrowing costs for banks, which means they're able, but not forced, to lower their own lending rates.

Banks are generally very quick to move their prime rate higher in tandem with Bank of Canada hikes. They've been less consistent on the way down. But when the central bank last lowered its rate four years ago, banks did follow suit within a day.

Canadian banks also have more flexibility in deciding to cut than they used to. Banks choose how much interest they add to the Bank of Canada rate, and that buffer has widened over the past couple of decades.

From the mid-1990s to 2008, the added margin averaged around 1.5 per cent. It rose to 1.75 per cent until around 2015, and since then has stood at around two per cent added to the bank rate.

What does it mean for my mortgage?

If banks move their prime rate down, it will have an immediate effect on borrowers with variable-rate mortgages, just as they've felt the brunt of rising rates.

Those with a fixed-rate mortgage will not see their payments change until it comes time to renew their loans.

Fixed-mortgage rates are determined by what happens to the bond market, which, while also affected by Bank of Canada rate decisions, is based on overall investor confidence. The market had already largely priced in the rate cut.

How much savings on a mortgage can be expected from the rate cut?

A quarter percentage point cut doesn't translate into a major change in monthly mortgage payments. Someone with a $600,000 mortgage, 25-year amortization and a six per cent interest rate would save about $88 a month if the rate was 5.75 per cent.

What does it mean for lines of credit and credit cards?

Lines of credit are generally tied to bank prime rates, so borrowers should see some savings if banks reduce their prime rates.

Credit card rates are more fixed, so consumers shouldn't expect much of a break there.

What does it mean for my savings account rate and Guaranteed Investment Certificates?

Savings accounts and GICs have seen higher returns as rates rose, and could see that reverse if prime rates go down in line with the Bank of Canada.

GIC rates have already started trending down in anticipation of rate cuts, though some smaller financial institutions have maintained higher rate offerings in an effort to lure customers.

ORIGINAL 6:55 a.m.

The Bank of Canada cut its key interest rate for the first time in more than four years today, marking a major turning point in its fight against inflation.

Governor Tiff Macklem says the Bank of Canada has more confidence inflation is moving closer to its two per cent target, citing various indicators that suggest price pressures have retreated.

“If inflation continues to ease, and our confidence that inflation is headed sustainably to the two per cent target continues to increase, it is reasonable to expect further cuts to our policy interest rate,” Macklem said in remarks prepared for a morning press conference.

“But we are taking our interest rate decisions one meeting at a time.”

With the quarter-percentage-point cut, the central bank’s key interest rate now stands at 4.75 per cent.

Wednesday’s rate cut opens a new chapter for the Bank of Canada, which has been preoccupied with wrestling inflation down over the last two years.

With inflation down significantly and the economy stalling, most forecasters believed it was the right time for the central bank to begin lowering borrowing rates.

Canada’s annual inflation rate has steadily declined in recent months, reaching 2.7 per cent in April. Measures of underlying price pressures have also eased, giving the central bank more confidence that inflation will continue to trend lower.

The Canadian economy has also weakened under the weight of high interest rates. Economic growth in the first quarter came in lower than forecasters expected, and the unemployment rate has steadily risen, reaching 6.1 per cent in April.

Wednesday’s announcement puts the Bank of Canada ahead of other central banks in the Western world in cutting interest rates, including the U.S. Federal Reserve.

Macklem is scheduled to hold a news conference Wednesday morning to discuss the central bank’s latest interest rate decision.