June 7, 2024 CMSpeople

Bank of Canada Cuts Rates for the First Time Since Pandemic

The Bank of Canada (BoC) surprised some economists by announcing a rate cut on June 5th, 2024. This marks the first time the central bank has lowered its overnight lending rate since the early days of the COVID-19 pandemic.

The Cut: From 5% to 4.75%

The BoC reduced its target for the overnight rate by 25 basis points, bringing it down to 4.75%. This means that the interest rate at which banks lend to each other overnight has decreased. The Bank Rate, which commercial banks use as a benchmark for their prime lending rates, also sits at 5%.

Prime lending rate (the benchmark rate at which the banks lend variable rate money to consumers): Good news for borrowers with variable-rate loans! The prime lending rate has dropped 25 basis points, from 7.20% to 6.95%. This means lower interest rates on variable-rate mortgages and other loans.

Reasons for the Cut

The Bank of Canada cited concerns about slowing global economic growth, particularly in the United States, as a reason for the rate cut. While inflation remains a concern, the BoC seems to be taking a cautious approach to balance economic growth with price stability.

Impact on Borrowers and the Housing Market

The rate cut could be positive news for borrowers with variable-rate mortgages or loans tied to the prime rate. They may see a decrease in their interest payments. However, the impact is likely to be modest as the cut was only 0.25%.

The housing market could also be impacted. With borrowing potentially becoming slightly cheaper, some potential homebuyers who were on the sidelines may be re-entering the market. However, the BoC has cautioned that they are still monitoring inflation closely and further rate cuts are not guaranteed.

What’s Next?

The Bank of Canada will next announce its interest rate decision on July 24th, 2024. This announcement will be accompanied by the Monetary Policy Report, which will provide a more detailed outlook on the Canadian economy and inflation.

Forecast: Bank forecasts suggest at least another 25-50 basis point interest rate decrease this year, though these forecasts can be adjusted and pushed back as new inflation data emerges.

This is a developing story, and it will be interesting to see how the Bank of Canada balances its goals of economic growth and price stability in the coming months.

 

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