The Bank of Canada has taken another bold step, reducing its policy rate by 50 basis points to 3.25% on December 11. This marks the fifth consecutive rate cut this year, solidifying its position as one of the most aggressive central banks in the world in 2024. While this decision brings relief to many borrowers, it also signals a shift in the economic landscape. Let’s break down what this means for your finances and what’s on the horizon.

A Historic Rate Cut—What Happened?

The central bank’s latest decision marks the second consecutive 50-basis-point cut, a rarity seen only during significant economic downturns like the 2008 financial crisis and the onset of the COVID-19 pandemic. Bank of Canada Governor Tiff Macklem stated that with inflation back to the 2% target range, monetary policy no longer needs to remain in restrictive territory.

The Bank of Canada aims to stimulate economic growth by addressing weaker-than-expected GDP growth (1% in Q3 vs. a forecast of 1.5%) and rising unemployment, which reached 6.8% in November.

How Borrowers Will Benefit

Variable-Rate Mortgage Holders

If you have a variable-rate mortgage, this rate cut is great news for your monthly budget. Borrowers can expect to save approximately $28 per $100,000 of debt. For example, if you have a $400,000 mortgage, this translates to a monthly savings of about $112.

Adjustable-Rate Mortgages

Borrowers with adjustable-rate mortgages will experience a direct reduction in their monthly payments as the prime rate drops. For a $500,000 mortgage, this could mean savings of around $140 per month.

Fixed-Payment Variable-Rate Mortgages

While your monthly payment remains the same, the rate cut shifts how your payments are allocated. A larger portion will now go toward reducing your principal, enabling you to pay off your mortgage faster.

HELOCs and Personal Lines of Credit

Borrowers using Home Equity Lines of Credit (HELOCs) or personal lines of credit, which are tied to the prime rate, will see reduced interest charges. This means more disposable income each month and greater financial flexibility.

Fixed-Rate Mortgage Holders

For those with fixed-rate mortgages, your payments won’t change since your rate is locked in for the term of your mortgage. However, you may still benefit from refinancing options if the lower rates align with your financial goals.

Why the Bank of Canada Is Cutting Rates

With inflation now hovering around 2%, the Bank of Canada is shifting its focus to stimulate economic growth. Several factors influenced this decision:

• Slower-than-expected Growth: Economic growth in late 2024 has been softer than projected, with Q3 GDP growth at 1% and further slowdown expected in Q4.

• Rising Unemployment: November saw an unemployment rate of 6.8%, highlighting excess capacity in the labor market.

• Federal Policy Impacts: Reduced immigration targets and temporary GST/HST holidays are expected to influence growth and inflation. The GST/HST holiday, for instance, may temporarily lower inflation to 1.5% in January before it normalizes in mid-February.

Challenges and Uncertainties Ahead

While borrowers are benefiting, challenges loom on the horizon. Key uncertainties include:

• Potential U.S. Tariffs: Incoming U.S. President Donald Trump has proposed a 25% tariff on Canadian exports, which could have major economic implications.

• Mixed Economic Signals: Despite a rising unemployment rate, consumer spending remains strong, and the real estate market is rebounding.

• Slowing Pace of Rate Cuts: Experts anticipate a more cautious approach to rate reductions in 2025, with smaller quarter-point cuts likely.

What’s Next for Borrowers and the Economy?

The Bank of Canada’s next rate decision is scheduled for January 29, 2025. While additional cuts are expected, the pace is likely to slow as the overnight rate approaches the neutral range of 2.75%.

What Borrowers Can Do

• Reassess Your Mortgage: Explore refinancing options or consider switching from fixed to variable rates to maximize savings.

• Optimize Debt Repayment: Use the reduced interest charges to pay down principal faster on loans or credit lines.

• Plan Ahead: Stay informed about upcoming rate decisions and be prepared for potential economic shifts.

The Bank of Canada’s aggressive rate cuts offer a lifeline to borrowers, providing immediate financial relief and long-term savings opportunities. However, uncertainties like U.S. tariffs and slowing economic growth require cautious financial planning. Whether you’re a homeowner, investor, or everyday borrower, now is the time to consult with financial advisors and reassess your strategies to make the most of this changing economic landscape.