The Bank of Canada (BoC) has just lowered its key interest rate, a decision that sends ripples through the entire Canadian economy. On October 29, the central bank announced a 25-basis-point cut, bringing the overnight rate down to 2.25%. While economists largely anticipated this move, it signals a cautious approach to navigating current economic challenges.
This blog post will explain what this interest rate change means for you. We’ll cover the reasons behind the Bank of Canada's decision, how it will affect your finances—from mortgages and savings to daily spending—and what to expect from the economy in the coming months. Understanding this shift is the first step toward making smarter financial decisions.
Why Did the Bank of Canada Cut Interest Rates?
The decision to lower interest rates wasn't made in a vacuum. It’s a strategic response to several pressures facing the Canadian economy. The primary goal is to stimulate economic activity and keep inflation under control.
Economic Slowdown and Trade Uncertainty
A key factor is the noticeable slowdown in the Canadian economy. According to the Bank of Canada, the economy shrank in the second quarter of this year, driven by a drop in exports and lower business investment. This slowdown is heavily linked to the ongoing U.S. trade war, which has hit crucial sectors like auto, steel, and aluminum. The bank noted that these trade conflicts are causing "structural damage" and reducing the economy's overall capacity. As a result, GDP growth is expected to remain weak for the rest of the year.
Inflation Remains in Check
The Bank of Canada's core mandate is to keep inflation near its 2% target. With current inflationary pressures described as "contained," the bank felt it had room to lower rates without risking a surge in prices. Governor Tiff Macklem stated that if the economy develops as projected, the new 2.25% rate is "at about the right level to keep inflation close to two per cent."
Weakness in the Labour Market
While the unemployment rate held steady at 7.1% in September, the central bank pointed to signs of weakness in the labour market. Hiring has slowed, indicating that businesses are hesitant to expand their workforce amidst economic uncertainty. A rate cut aims to make borrowing cheaper for businesses, encouraging them to invest and create jobs.
How the Rate Cut Affects Your Finances
A change in the Bank of Canada's key rate has a direct impact on the interest rates set by commercial banks for consumer products. Here’s a breakdown of what you can expect.
Mortgages and Loans
If you have a variable-rate mortgage or a home equity line of credit (HELOC), you will likely see your interest payments decrease. Commercial banks typically adjust their prime rates in line with the BoC's overnight rate, so your borrowing costs should fall. This could free up some extra cash in your monthly budget.
For those with fixed-rate mortgages, there won't be an immediate change. However, if your mortgage is up for renewal soon, you may be able to lock in a new, lower rate. This rate cut also makes it slightly cheaper for new homebuyers to secure a mortgage, which could provide a boost to the real estate market.
Savings Accounts and GICs
The news isn't as good for savers. When the key interest rate drops, the interest paid on savings accounts and Guaranteed Investment Certificates (GICs) also tends to fall. Financial institutions will offer lower returns on these products, meaning your savings will grow at a slower pace. If you rely on interest income, you may feel a pinch from this change.
The Canadian Dollar
Interest rate changes often influence the value of a country's currency. A lower interest rate can make the Canadian dollar less attractive to foreign investors, who seek higher returns on their investments. This can cause the loonie's value to drop relative to other currencies, like the U.S. dollar.
A weaker dollar makes imported goods more expensive for Canadians. However, it’s good news for exporters, as Canadian products become cheaper and more competitive on the global market.
What's Next for the Economy?
The Bank of Canada has signaled that this might be the end of its rate-cutting cycle for now. Governor Macklem indicated that if the economy performs as expected, the current 2.25% rate should be sufficient to guide the economy through its current adjustments.
The bank is projecting weak but positive growth for the remainder of the year and into the next. It forecasts a 0.5% annualized rise in GDP in the third quarter, followed by 1% growth in the fourth quarter. Looking further ahead, the projections are for 1.1% growth in 2026 and 1.6% in 2027.
While business investment and exports are struggling, the bank noted that consumer spending has remained healthy. This, along with government spending and real estate investment, is expected to support the economy in the coming months.
Navigating the New Rate Environment
The Bank of Canada's decision to lower interest rates is a clear signal that it's taking action to support a slowing economy. While the cut offers relief to borrowers, it presents a challenge for savers. Understanding these effects allows you to adjust your financial strategy accordingly.
If you have debt, now could be an excellent time to explore refinancing options or accelerate your repayment plan. If you're a saver, you may need to reconsider your investment strategy to achieve your financial goals. By staying informed and proactive, you can navigate this economic shift and make decisions that strengthen your financial future.
