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Bank of Canada Decreases Policy Rate

Bank of Canada Decreases Policy Rate

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    Bank of Canada Decreases Policy Rate

    The Bank of Canada has accelerated its rate cuts, reducing the overnight policy rate by 0.50% today from 4.25% to 3.75%. A sluggish Canadian economy has already prompted the BoC to decrease rates earlier and faster than other central banks. Before today, the Bank of Canada had implemented 3 straight cuts of 25 basis points (0.25%) each since June. Even with these rate reductions, the economic outlook is worsening, as inflation risks have fallen below the BoC’s 2% target.

    The year-over-year growth of the consumer price index (CPI) has dipped below 2% for the first time since the pandemic, partly due to lower energy prices but also reflecting broader easing of inflation pressures. Risks of deflation are mounting as the economy remains under strain. As seen through Q3 gross domestic product (GDP), growth looks to have fallen short of the BoC’s 2.8% forecast from July, the unemployment rate is now 1 whole percentage point (1%) higher than a year ago, and job openings continue to decline.

    There is growing concern among policymakers that current interest rates are imposing too much pressure on the economy, leading to higher unemployment and lower GDP per capita than necessary. Governor Tiff Macklem has stressed that economic growth must improve to prevent inflation from dropping below the 2% target, noting that inflation falling too low is as concerning as it rising too high. Given the delayed effect of rate adjustments on the economy, the BoC is working to bring rates closer to a neutral level, estimated between 2.25% and 3.25%. However, further cuts may be required, with another 50 bps reduction expected in December and the possibility of rates falling to 2% by mid-2025 to prevent prolonged economic weakness.

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    The Bank of Canada Policy Rate Is Now 3.75%

    The Bank of Canada’s recent decision to lower its key interest rate by 0.50% has significant implications for mortgage rates, inflation, and the overall Canadian economy. This move is intended to foster economic growth while managing inflation, reflecting the central bank’s responsiveness to current economic conditions. Homeowners and prospective buyers should consider how this adjustment will affect their financial strategies, considering the prime rate, shifts in monetary policy, and the broader effects on the job market.

    With this latest rate cut, homeowners and prospective buyers should consider how the lower interest rates will impact their mortgages and financial planning. The recent change in monetary policy shows that the Bank of Canada prioritizes economic growth over just keeping inflation in check. While lower interest rates may provide some relief for those renewing mortgages, the financial situation is still complicated due to increasing unemployment and a slowing economy.

    The Bank of Canada adjusts its policy interest rate 8 times a year, enabling it to respond to economic fluctuations. Changes to the overnight rate will impact all mortgage interest rates. Still, the mortgage rate offered by your lender will vary based on factors such as creditworthiness, loan-to-value (LTV) ratio and the mortgage type/term selected. With the possibility of payment shock at renewal, it’s crucial to budget and plan carefully, as the interest component of payments could rise significantly.

    Explore how these recent changes might influence your mortgage and financial planning.

    Why the Bank of Canada is Doubling Down on Rate Cuts

    The Bank of Canada’s recent rate cut affects all Canadians, influencing everything from mortgage payments to investment strategies. To improve cash flow, focus on paying off high-interest debts and delaying non-essential expenses, which can help ease personal inflation and support broader economic stability. Policymakers are increasingly concerned that elevated interest rates are straining the economy, leading to higher unemployment and lower GDP per capita. Governor Tiff Macklem stressed the need to stimulate economic growth to prevent inflation from falling too far below the BoC’s target.

    Neutral Rate Still Ways Away

    Despite monetary easing throughout the summer, the current policy rate remains above the neutral rate, estimated to be between 2.25% and 3.25%. With inflationary pressures easing, the BoC may continue to lower rates, potentially bringing the rate closer to the neutral level to avoid further economic weakness.​

    Bank of Canada Governor Tiff Macklem faces criticism from economists, who argue he’s fallen behind in addressing economic conditions. Despite the central bank cutting rates by 75 basis points (0.75%) over the past year, inflation has dropped even further—down more than 200 bps to 1.6%—causing the real policy rate to tighten by more than 140 bps. Despite rate cuts, this tightening has increased borrowing costs for mortgages, loans, and other debts, discouraging spending and investment. 

    Some economists argue that to stimulate economic activity, the Bank of Canada may need to cut rates more aggressively, especially as inflation expectations continue to trend lower. Paul Beaudry, a former BoC deputy, and National Bank’s chief economist, Stéfane Marion, both support more significant rate cuts, with Marion suggesting a quick return to the neutral rate of 3%. If the central bank does not act swiftly, there is concern that high unemployment and tight policy rates could push Canada into a recession. However, market expectations and nesto’s mortgage rate forecast suggest that reaching the neutral rate may not happen until late 2025.

    Employment Moderating

    Canada saw a significant boost in employment, adding a net total of 47,000 jobs in September. Most notably, 112,000 full-time positions were created, offsetting a loss of 65,000 part-time jobs. This shift towards full-time employment is one of the most robust job reports over 3 years. Additionally, average hourly earnings decreased, easing inflationary pressures. Overall, the report reflects a stronger job market, with employers hiring and transitioning many workers from part-time to full-time, signalling positive economic momentum. 

    During the benchmark interest rate hikes from 2021 to 2023, concerns arose about a potential mortgage renewal payment shock harming the Canadian economy. According to RBC, mortgage renewals could slow growth but still leave next year’s renewal wave manageable due to the Bank of Canada’s rate cuts and stable employment—though the latter is increasingly uncertain as labour market data weakens. The BoC’s 75 basis point cuts have eased pressure on mortgage holders, with many renewing at lower rates, variable-rate mortgage (VRM) holders seeing lower interest carrying costs, and adjustable-rate mortgage (ARM) holders seeing reduced monthly mortgage payments. The more significant issue is labour market weakness, as unemployment is expected to rise 7% by 2025, potentially reducing household disposable income. Job openings are down 25% from a year ago, and any further declines in hiring could push unemployment even higher, putting additional pressure on the economy.

    Inflation Below Target 

    The Consumer Price Index (CPI) increased by 1.6% year-over-year in September, down from a 2.0% rise in August, marking the smallest yearly increase since February 2021. The primary factor for this slowdown was a sharp drop in gasoline prices, which fell 10.7% in September compared to 5.1% in August. However, excluding gasoline, the CPI rose 2.2%, matching the August rate. Despite the slower pace of price increases, the CPI has risen 12.7% since September 2021, and on a month-over-month basis, the CPI dropped by 0.4% in September, led by a 7.1% decline in gasoline prices. These trends have contributed to the BoC’s decision to maintain a dovish stance on monetary policy.​

    The Canadian Survey of Consumer Expectations for 2024 Q3 shows that while consumers’ inflation expectations have improved, they remain higher than pre-pandemic levels. Financial stress has eased with recent interest rate cuts and lower inflation, resulting in fewer reductions in spending. However, many consumers still expect higher interest rates, which could influence their spending choices. Job market perceptions have worsened, especially among younger consumers, with wage growth expectations declining for the first time since mid-2023.

    According to the Business Outlook Survey for 2024 Q3, businesses continue to face low inflationary pressures due to weak demand, excess capacity, and slowing price growth, similar to last quarter. Sales growth has been weak, driven by past inflation and high interest rates affecting consumers’ budgets. However, sales expectations have improved slightly this quarter, thanks to recent policy interest rate cuts and hopes for further reductions. 

    Canadian bond yields eased slightly after some positive news as inflation slowed in September. Canadian businesses and consumers expect lower inflation, which is a good sign for the Bank of Canada. When businesses expect smaller price increases, they tend to raise prices more slowly. Meanwhile, consumers feel less pressure to buy quickly, helping to bring inflation down over time.

    US Economy’s Impact on Canada 

    The Bank of Canada (BoC) carefully tracks developments in the US economy, where CPI inflation continues to be higher than expectations, complicating Canada’s rate-setting decisions. This divergence in inflation trends between the 2 countries presents challenges, especially since the US Federal Reserve has not reduced interest rates as significantly as the BoC. While nominal rates have been lowered in Canada, inflation has declined more quickly than expected, resulting in a tighter real policy rate stance. 

    With Canada’s GDP growth slowing to 0.9% and unemployment rising to 6.5%, some economists believe the BoC has been too slow in adjusting its monetary policy, driving further declines in bond yields, particularly for the 2- and 5-year terms. Additionally, the Canadian dollar, which has fallen to 74 cents USD, raises concerns about its strength, especially if the BoC continues to cut rates more aggressively than the US Fed.

    BMO senior economist Robert Kavcic noted that while bond yields have stalled, Canada’s lower-than-expected inflation report suggests quicker rate cuts are likely. The Bank of Canada is expected to cut its benchmark policy rate by 200 to 250 basis points (2 to 2.5%) over the next year, but long-term fixed mortgage rates will likely decline by much smaller amounts. Fixed mortgage rates are influenced by bond markets, which have seen fluctuations recently. Bond yields dropped over the summer due to anticipated rate cuts from central banks but rebounded slightly as the US economy showed unexpected strength.

    The latest US CPI inflation report showed concerning signs, with inflation trending upwards, contradicting expectations. The US Producer Price Index (PPI) also rose, now approaching the low 3% range, aligning with the recent surge in bond yields. The bond market may have anticipated the inflationary pressures. Canada’s 5-year bond yield has fluctuated around the 3% mark, making the 3% level now a critical threshold. If yields breakthrough this threshold, they could rise further, but failure to hold might push the yield down. Despite robust economic data from the US PPI and Canadian jobs report, bond yields did not react as expected, indicating a potentially volatile bond market ahead.

    The USD has strengthened, driven by robust economic data, but some analysts expect this rally to stall in the short term. The bond market has also seen fluctuations, with US bond yields consolidating in a narrow range. As the US election draws nearer, markets are on edge, waiting to see how political and economic factors will play out. Meanwhile, in the US, stock markets have rallied to new highs, and despite bearish concerns about factors like inflation and bond yields, optimism about a potential after-election market boost keeps investors bullish.

    Throughout 2024, concerns about the Bank of Canada’s rate cuts have focused on the devaluation of the Canadian dollar, particularly against the US dollar. The CAD has weakened by approximately 4.6% over 9 months, dropping from $1.32 CAD per USD in January to about $1.38 CAD per USD today. Despite some experts suggesting that the cuts wouldn’t significantly impact the CAD, the currency’s depreciation, even after 50 basis points (0.50%) rate cut by the Fed in its federal funds rate last month, signals potential economic challenges and inflation risks, especially for imports. Currency markets often predict trends well in advance, and the continued weakness of the CAD, despite rising bond yields and oil prices, is troubling. 

    Housing Becoming More Affordable 

    Despite initial fears that the Bank of Canada’s recent rate cuts would spark housing inflation, the opposite occurred in 2 of Canada’s biggest housing markets. In September, Toronto experienced a 9.8% increase in new listings, significantly outpacing the 3.3% rise in home sales, leading to a 0.5% decline in average home prices. Similarly, new listings surged by 50% in Vancouver while sales dropped 2.7%, causing a 1.4% price decrease. This cooling in the Canadian housing market was necessary, as shelter inflation, though still elevated at 5.3%, had begun to ease. In comparison, inflation in other sectors dropped to just 0.5% year over year.

    Explore how these recent changes might influence your mortgage and financial planning.

    How Bank of Canada Rate Changes Affect Your Mortgage Payments

    For example, if you have a $500,000 mortgage secured at nesto’s 5-year variable low rate of , your monthly payment would be $3,115.39. On every $100,000 balance, your mortgage payment will be $573.00, while your stress-tested mortgage payment will be $694.07.

    Common mortgage amounts and corresponding mortgage payments on nesto’s 5-year variable low rate of on a 25-year amortization. Qualifying mortgage payment affects all new mortgages, which need to be qualified on stress-tested payment based on the contract rate plus 2% ().

    October 2023 vs. October 2024: What’s Different?

    How has housing affordability evolved over the past year? The landscape has shifted dramatically. While renting provides an immediate housing solution, it doesn’t offer the long-term benefits of building equity through homeownership. Over the past year, rent prices have surged at a faster pace than homeownership costs, making it harder for renters to make the leap into the housing market. Delaying homeownership could mean missed opportunities and facing a tougher market down the road. Let’s break down the costs and take a closer look at how renting compares to owning a home today.

    Today, Canada’s benchmark home price is $713,200, while a year ago, it was $737,900, which has decreased by 3.3%. However, the lowest 5-year variable mortgage rate at nesto has decreased from 5.95% a year ago to today. These changes mean that Canada’s average monthly mortgage payment has decreased from $3,785.421 to $3,435.922. This implies that nationally, the average insurable mortgage payment decreased by 9.23% from a year ago. In comparison, during that same period, Canada’s average national rent increased by 3.9% from $2,075 to $2,159, which in dollars is $84 year-over-year.

    TL; DR— Canada‘s monthly mortgage payment decreased by 9.23%. Meanwhile, average home prices decreased by 3.3%, and average national rents have increased by 3.9%. In dollars, mortgage payments have decreased by $349.50, average home prices have decreased by $24,700, and average national rents have increased by $84.

    Today, Quebec’s benchmark home price is $492,300, while a year ago, it was $466,600, which has increased by 5.7%. However, the lowest 5-year variable mortgage rate at nesto has decreased from 5.95% a year ago to today. These changes mean that Quebec’s average monthly mortgage payment has decreased from $2,388.531 to $2,371.712. This implies that, provincially, the average insurable mortgage payment decreased by 0.70% from a year ago. In comparison, during that same period, Quebec’s average provincial rent unchanged by 0.0% from $1,967 to $1,967, which in dollars is $0 year-over-year.

    TL; DR—In Quebec, the monthly mortgage payment decreased by 0.70%, average home prices increased by 5.7%, and average provincial rents have unchanged by 0.0%. In dollars, mortgage payments have decreased by $16.82, average home prices have increased by $26,700, and average national rents have unchanged by $0.

    Today, Ontario’s benchmark home price is $858,500, while a year ago, it was $894,700, which has decreased by 4.0%. However, the lowest 5-year variable mortgage rate at nesto has decreased from 5.95% a year ago to today. These changes mean that Ontario’s average monthly mortgage payment has decreased from $4,589.801 to $4,135.922. This implies that, provincially, the average insurable mortgage payment decreased by 9.89% from a year ago. In comparison, during that same period, Ontario’s average provincial rent decreased by 4.0% from $2,475 to $2,380, which in dollars is $95 year-over-year.

    TL; DR—In Ontario, the monthly mortgage payment decreased by 9.89%, average home prices decreased by 4.0%, and average provincial rents have decreased by 4.0%. In dollars, mortgage payments have decreased by $453.88, average home prices have decreased by $36,200, and average national rents have decreased by $95.

    Today, Alberta’s benchmark home price is $512,700, while a year ago, it was $480,000, which has increased by 6.81%. However, the lowest 5-year variable mortgage rate at nesto has decreased from 5.95% a year ago to today. These changes mean that Alberta’s average monthly mortgage payment has increased from $2,462.401 to $2,469.992. This implies that, provincially, the average insurable mortgage payment increased by 0.31% from a year ago. In comparison, during that same period, Alberta’s average provincial rent increased by 10% from $1,652 to $1,835, which in dollars is $184 year-over-year.

    TL; DR—In Alberta, the monthly mortgage payment increased by 0.31%, average home prices increased by 6.81%, and average provincial rents have increased by 10%. In dollars, mortgage payments have increased by $7.59, average home prices have increased by $32,700, and average national rents have increased by $184.

    Today, British Columbia’s benchmark home price is $961,300; a year ago, it was $985,400, which has decreased by 2.45%. However, the lowest 5-year variable mortgage rate at nesto has decreased from 5.95% a year ago to today. These changes mean that British Columbia’s average monthly mortgage payment has decreased from $5,055.091 to $4,631.172. This implies that, provincially, the average insurable mortgage payment decreased by 8.39% from a year ago. In comparison, during that same period, British Columbia’s average provincial rent decreased by 3% from $2,647 to $2,570, which in dollars is $77 year-over-year.

    TL; DR—In British Columbia, the monthly mortgage payment decreased by 8.39%, average home prices decreased by 2.45%, and average provincial rents have decreased by 3%. In dollars, mortgage payments have decreased by $423.92, average home prices have decreased by $24,100, and average national rents have decreased by $77.

    *1 and 2: Values for mortgage payments calculated based on nesto’s variable rate over a 25-year amortization period with a 20% downpayment using the average/benchmark home price in the stated month as reported by CREA for the location.

    How Bank of Canada Rate Changes Affect Your Mortgage Payments and Interest Costs*

    September 2023

    Fixed Rate: 5.49%

    Home Price: $737,900

    20% Downpayment: $147,580

    Mortgage Needed: $590,320


    → $3,599.83 monthly mortgage payment 


    → $152,083 in total interest over 5-year term

    September 2024

    Fixed Rate: 4.19%

    Home Price: $713,200

    20% Downpayment: $142,640

    Mortgage Needed: $570,560


    → $3,060.32 monthly mortgage payment 


    → $111,385 in total interest over 5-year term

    September 2023

    Variable Rate: 5.95%

    Home Price: $737,900

    20% Downpayment: $147,580

    Mortgage Needed: $590,320


    → $3,785.42 monthly mortgage payment 


    → $167,310 in total interest over 5-year term

    September 2024

    Variable Rate:

    Home Price: $713,200

    20% Downpayment: $142,640

    Mortgage Needed: $570,560


    → $3,435.92 monthly mortgage payment

    → $143,386 in total interest over 5-year term

    *For illustrative purposes only, when comparing against nesto’s 5-year lowest fixed and adjustable insured and insurable mortgage rates, with a 20% downpayment & 25-year amortization, using Canada’s composite average home price data as made available through CREA. Other limiting terms & conditions apply. Rates are subject to change without notice.

    Smart Financial Moves After the Bank of Canada’s Latest Rate Cut

    In the wake of the Bank of Canada’s decision to cut the policy rate again, Canadians should reassess their mortgage strategy. For homeowners up for renewal in this housing market, many options are available. Multiple rate holds on your early renewals remain a viable choice, while extended mortgage terms could provide a hedge against resurging inflation.

    Potential homebuyers might save more in the long run with a slightly higher initial payment if it results in a lower home price and a smaller mortgage. Those considering waiting to buy this fall should note that delays could lead to higher costs beyond increased mortgage rates, as reduced rates may boost demand for limited housing. With inflation under control, the Bank of Canada is expected to lower rates, which could attract more buyers and increase property values.

    For well-qualified homebuyers and homeowners up for renewal, an adjustable-rate mortgage (ARM) could provide immediate savings on your budget as the BoC continues to reduce policy rates over the upcoming months. Unlike a variable-rate mortgage (VRM), an ARM’s monthly payment will adjust with each adjustment in the lender’s prime rate. The market is ever-changing, and understanding the mortgage rate forecast is critical to optimizing your mortgage strategy.

    Mortgage Strategy Considerations 

    Every rate cut by the Bank of Canada can significantly influence your financial situation. For instance, a shift of 100 basis points (1%) in interest rates can enhance your buying power by 10%. Even a modest 0.25% reduction could lower your mortgage payment by 2.5%. The latest interest rate decision has relieved those with variable-rate (VRM) and adjustable-rate mortgages (ARM), leading to slightly lower interest payments.

    • Fixed-rate mortgages buffer against fluctuations, but planning for future renewals is essential.
    • VRMs offer potential interest savings and shortening amortization, but rate changes can impact payments. Borrowers with VRMs may experience higher payments due to renewal payment shock.
    • ARMs can provide immediate savings with each prime rate decrease but may strain monthly budgets.
    • HELOC holders should evaluate their debt and consider consolidating into fixed-rate options for stability and a more predictable principal balance paydown.
    • Collateral-charge mortgages provide holders with hybrid mortgage flexibility, allowing them to hedge with different term lengths or explore hybrid mortgages to split their mortgage balance between fixed and variable rates.

    Should You Early Renew Your Mortgage?

    Given the uncertainty of the Bank of Canada’s policy rate, considering an early mortgage renewal may be wise. If your budget is tight, switching from a variable to a fixed-rate mortgage can stabilize payments for 3 to 5 years and potentially lower monthly costs as long-term fixed rates have decreased. It’s advisable to consult your mortgage expert about your renewal or refinancing options. This will help you fully understand and calculate the cost-saving benefit of renewing or refinancing.

    When switching lenders, the federal government allows borrowers with insured mortgages to re-qualify at their contract rate, providing more flexibility for renewals or converting to a fixed rate. Stay informed about these options and discuss them with your lender to understand potential savings.

    Today, at nesto’s lowest variable rate, households would need $18,529.54 in annual income for every $100,000 mortgage balance versus the $22,339.69 required to qualify through a stress-test for a similar mortgage balance. Or even less so on nesto’s lowest fixed rate today. 

    Should You Extend Your Mortgage Term?

    Considering the recent rate cut from the Bank of Canada, extending your mortgage term can be an option. The blend-and-extend method lets you renew early at a lower weighted rate, which can help you lock in a lower payment. However, if rates drop after you extend, you might pay more interest in the long run. A mortgage refinance is often a simple way to tap into your equity or enhance your cash flow by extending your amortization or consolidating higher-interest debts into one manageable payment.

    Why Not Rent While You Wait to Buy?

    Amassing a substantial downpayment is often the first hurdle Canadians encounter in their quest for homeownership. This financial milestone, however, can be reached through various avenues, each tailored to different financial situations and goals. 

    Compare renting versus owning costs, where annual rent may cover mortgage payments, albeit renting doesn’t build equity. Inflation will continue to increase Canadian home prices while eroding affordability, so buy now if your finances allow. By waiting on the sidelines, you risk missing out and could face an even more restrictive housing market.

    Final Thoughts

    The Bank of Canada’s 0.50% rate cut signals that further reductions may be on the horizon. Still, the market may have underestimated the extent and speed of these cuts as the economy deteriorates. While the BoC aims to balance inflation control with economic stability, ongoing economic challenges and fluctuations make it difficult to forecast mortgage rates with certainty.

    Mortgage experts agree that rates will fall, but homebuyers shouldn’t expect rates to drop below 3.5% anytime soon. For those looking to purchase a home, ARM or VRM may offer more flexibility, allowing buyers to lock in lower fixed rates as the market adjusts. Given the current economic climate and the possibility of further rate fluctuations, nesto’s Prime Time mortgage offers a unique opportunity to secure immediate savings while maintaining flexibility and protection against future uncertainty.

    Nesto’s Prime Time mortgage offer presents a compelling solution for those navigating this uncertain rate environment. With Prime Time, you get immediate savings through a variable rate that adjusts with each BoC rate cut, including an initial discount to compensate for potentially missing out on a lower fixed rate. Prime Time allows you to switch to a fixed rate without penalty, offering a safety net to lock in your rate anytime.

    If you’re getting ready for a mortgage renewal or a home purchase, the best way forward is to speak with our mortgage expert. With as little as 5 minutes to complete an application, you’ll be well on your way to your most suitable mortgage solution. Contact us today!


    Why Choose nesto

    At nesto, our commission-free mortgage experts, certified in multiple provinces, provide exceptional advice and service that exceeds industry standards. Our mortgage experts are non-commissioned salaried employees who provide impartial guidance on mortgage options tailored to your needs and are evaluated based on client satisfaction and advice quality. nesto aims to transform the mortgage industry by providing honest advice and competitive rates using a 100% fully digital, transparent, seamless process.

    nesto is on a mission to offer a positive, empowering and transparent property financing experience – simplified from start to finish.

    Contact our licensed and knowledgeable mortgage experts to find your best mortgage rate in Canada.


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