Bank of Canada Rate Cut July 2024: Impact on Mortgages and Economy

The Bank of Canada just cut the overnight rate by another 0.25%. For the second consecutive month, they’ve lowered the rate. In total, a 0.50% drop in two months. (not enough, but it’s a start) Great news for anyone in a Variable rate mortgage. It means you will be paying 0.50% less on your mortgage. We can expect further cuts this year and next. Read on for more details.

And it’s also good news for those looking at fixed-rate mortgages. Fixed-rate shoppers will see some downward movement in the coming days and weeks. Important to remember, fixed rates are not directly impacted by the Bank of Canada rate. Fixed rates are directly tied to the Gov’t of Canada Bond Yields. They are indirectly affected by the Bank of Canada rate…more on this below.

THE BANK OF CANADA HAS SOUNDED THE ALARM.

At the July 24th Bank of Canada meeting, the BoC Governor Tiff Macklem said Canada’s economy is likely to grow by 1.5% but they also expect to see a 3% population growth. That’s another 1.2million people! (some think this number is even higher as our Federal Govt’s counting has been less than reliable over the past few years). This means our growth is actually negative. Yikes!

Consumer Price Index or CPI (used to measure inflation) has dropped to 2.7%. This is fascinating. Our mortgage payments and rents have skyrocketed over the last 4 years (double in many major cities). But somehow our inflation is just 2.7%. What will happen when the interest rate cuts kick in? Probably lower inflation rate which will give more reason for the BoC governor Macklem to lower rates faster.

LET’S STOP THERE FOR A MINUTE.

Now let’s get serious. We have to call out the Bank of Canada governor, Tiff Macklem. He promised rates would stay low for at least 3 years back in September 2020. He reneged on that promise just 18 months later and began the biggest and longest rate hike cycle in recent memory. He raised the rate by 4.75% and it remained elevated until just last month when he cut the rate by 0.25%.

This just isn’t enough. Tens of thousands of Canadian homeowners are in financial trouble. They need help fast. Speed up the cuts and let’s get this economy back on its feet. For those that don’t know, a Bank of Canada governor never announces future rates let alone promising a rate hike or cut. So, when he said they would stay low for 3 years, this was groundbreaking. Everyone took this as being gospel.

WHEN AND HOW DO FIXED RATES CHANGE?

Without getting too technical, here’s how it works…. Effectively, when the Bank of Canada rate goes down, there is a time lag. Fixed rates will follow within a few days to a week as this usually affects the Gov’t of Canada bond yields. This lag time is normal. And this is in a declining rate market. But when rates are headed upward, things work differently. Historically, fixed rates usually go up well ahead of any Bank of Canada rate increase. If we look at the last few rate hike cycles, fixed rates increased about 60 to 90 days sooner.

WHAT CAUSES RATES TO FALL?

Forecasting rate movements is challenging but everybody should have an understanding on how it works. We can follow some simple rules. Bad economic data is good for mortgage rates. World banks lower rates to stimulate consumer spending and business borrowing costs. Inflation above the 3% target (set by the Bank of Canada) means rate cuts are unlikely. A slow and sluggish economy (like the one we are in now) will mean rate cuts are a good bet. Last bit of advice.. don’t try to forecast where rates are headed. Even the experts find this challenging. Instead, create a plan and strategy that’s right for your personal financial profile. Speak with an experience mortgage broker.

ADVICE AND PRODUCT OF CHOICE

For those with a mortgage up for renewal over the next few months, or those that are buying or refinancing, consider Variable rate. Variable rate will give you immediate savings if and when rates fall. And you can lock into a fixed rate at any time. (beware.. not all mortgages are alike.. some have restrictions and handcuffs that may not allow you to change or exit easily)

For those that are more cautious and not comfortable being in a Variable rate, consider a 1 or 2 year fixed rate term (if you can get a rate under 6%). Rates are expected to fall by around 2% by the end of next year. You want to be on the right side of that bottom.

We are in for an interesting second half of 2024. Enjoy the ride. Enjoy your summer.

Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.

Steve Garganis: 416-224-0114; steve@canadamortgagenews.ca