On Wednesday June 5th, Bank of Canada Governor Tiff Macklem announced a policy rate reduction of 25 basis points to 4.75%, down from 5.00%.
In the announcement, Macklem cited easing inflation (April 2024 CPI at 2.7% y/y), core inflation measures slowing, and lower-than-expected first quarter GDP growth. BoC’s three-month measures suggest continued downward momentum.
Macklem stated “with continued evidence that underlying inflation is easing, Governing Council agreed that monetary policy no longer needs to be as restrictive and reduced the policy interest rate by 25 basis points. Recent data has increased our confidence that inflation will continue to move towards the 2% target.”
Macklem did reiterate inflationary risk remains, while noting that it would be “reasonable” to expect further cuts and that the BoC will make ongoing interest rate decisions one at a time.
Where do rates go from here?
As always, this remains to be seen. In late-2023 and early-2024, most analysts predicted a series of rate cuts starting Q2-Q3 2024, with anywhere from 4-7 rate cuts in total for the 2024 calendar year. Inflation (most notably core CPI inflation) remained stubbornly higher than expected early into the year, and rate cut expectations were tempered. TD predicts two additional cuts in 2024, but as always, ongoing GDP growth and inflation figures will influence the BoC’s decisions.
What does this mean for your mortgage?
If you have a variable rate mortgage, the June rate cut means you can expect some relief. In fact, within a day, most major banks had already reduced their respective prime lending rates. Depending on the exact nature of your variable mortgage contract, you may see your regular mortgage payment decrease directly; alternatively, your mortgage payment may remain the same but more of your payment will go to pay principal, thereby reducing your amortization period.
If you have a fixed rate mortgage, you may still end up with a higher rate on your next renewal compared to your current rate. Many homeowners renewed their mortgages in 2022 or prior at fixed rates of 2.50% or lower. Depending on the rate environment when your current term comes up for renewal, you should prepare for the possibility of renewing at 4% or higher. If, on the other hand, you renewed your fixed rate mortgage more recently (after the 2022 rate hike cycle ended), you may end up renewing at a lower rate compared to your existing rate.
If you are looking to purchase a home, your income will stretch a bit further when dealing with lenders, since you’ll have a slightly lower mortgage payment than you’d have if you’d secured a mortgage in the last several months.
What does this mean for lines of credit, credit cards, savings accounts and GIC rates?
Lines of Credit, including Home Equity Lines of Credit (HELOCs), are usually tied to bank prime rates, and as such borrowers should see some interest savings on balances owing as bank prime rates move downward.
Savings account and GIC rates should also generally move downward in response to this rate cut, although smaller banks, digital banks and credit unions may keep their savings / GIC rates higher to attract customers.
What does this mean for your portfolio?
Generally speaking, interest rates and bond prices move inversely (opposite) each other, so when interest rates go down, bonds will appreciate in value. Therefore, those holding fixed income / bond funds should see an uptick in the market value of those holdings. Longer-term duration bonds (for instance, government bonds with 10-30 year duration) are more sensitive to rate fluctuations than shorter-term duration bonds (for instance, corporate bonds with a 5 year duration).
On the equities side, companies holding and servicing debt loads will now have slightly lower interest servicing costs. All things being equal, lower debt servicing means expenses go down and therefore share prices should also tick upwards.
With all of this said, markets and portfolios could see upward movement in the short-term.
Sources: Bank of Canada, Advisor.ca