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Tiff Macklem on June Bank of Canada rate cut
Photo by Dave Chan / AFP) (Photo by DAVE CHAN/AFP via Getty Images

Is today’s Bank of Canada rate cut “one and done” for now?

Variable-rate borrowers finally got their wish of a Bank of Canada rate cut today. But how long could they be waiting until the next?

The Bank of Canada today announced a 25-basis-point cut to its overnight target rate, bringing it to 4.75% and marking the bank’s first rate cut in more than four years.

In its statement, the Bank said recent data “has increased our confidence that inflation will continue to move towards the 2% target,” even though it admitted upside inflation risks remain.

Prime rate to fall to 6.95%

Banks and other financial institutions are expected to reduce their prime lending rates by an equal amount, bringing it to 6.95% in most cases.

Among the Big 6 banks, TD Bank remains a unique case, with its mortgage prime rate priced 15 bps higher as the result of an additional hike the bank made in 2016 independent of a Bank of Canada rate move.

Prime rate, which is used to price variable-rate mortgages and personal and home equity lines of credit (HELOCs), generally takes its cue from movements of the Bank of Canada‘s overnight target rate.

Today’s quarter-point rate reduction will translate into a savings of roughly $15 per $100,000 of loan…or about $60 for recent first-time buyers based on an average mortgage balance.

It’s also important to note that not all variable-rate mortgage holders will see their monthly payments change. Those with a fixed-payment variable mortgage will instead see the interest portion of their payment decline, while the amount going towards principal repayment will increase.

When is the next rate cut expected?

Bank of Canada Governor Tiff Macklem confirmed that future rate-cut considerations will be made on a meeting-by-meeting basis, depending on the continued trajectory of inflation.

“If inflation continues to ease, and our confidence that inflation is headed sustainably to the 2% target continues to increase, it is reasonable to expect further cuts to our policy interest rate,” Macklem said during a news conference.

“The first cut may not necessarily be the deepest, but it is the most significant, as it marks the official turning point after more than two years of restrictive policy,” noted BMO Chief Economist Douglas Porter. “This is indeed likely to be the first of a series of cuts, although that series is not going to be a straight line down by any means.”

Odds of a rate cut at the Bank’s next meeting in July fell to just 11%.

“Unless we see a very rapid deceleration in the Canadian economy, I think we get a cut in the fall, and maybe, maybe, maybe they squeak another one in by year end,” mortgage broker and rate expert Ryan Sims told CMT.

“My base case is one and done for a while though. I think inflation reignites and we start to get into a scenario whereby rate hikes are almost back on the table,” he added, particularly “if consumers start reacting to today’s cut by spending, while the USD rallies and drives prices back up.”

Current forecasts from the big banks see the benchmark rate falling to between 4.00% and 4.25% by year end.

“We believe that the path forward for the BoC is going to be slow,” noted TD senior economist James Orlando.

He said the BoC will have to ensure inflation pressures don’t rebound like they have in the U.S.

“It also doesn’t want to reignite the housing market, where prospective buyers have been waiting for greater interest rate certainty,” he added. “We expect the BoC is on a cut-pause-cut path, with the next cut likely occurring in September.”


Featured image: Dave Chan / AFP) (Photo by DAVE CHAN/AFP via Getty Images