The Bank of Canada delivered a 50-basis-point (bps) rate cut on Wednesday, bringing its policy rate to 3.75%, its lowest level in two years.

This marks the fourth straight rate reduction, providing more interest relief to Canadians carrying variable-rate debt.

Today’s move signals the Bank’s continued response to a weakening economy and inflation currently hovering just below its 2% target.

In his post-announcement press briefing, Governor Tiff Macklem said there was a “clear consensus that it was appropriate to take a larger step today.”

What this move means for borrowers

As a result of the move, prime rate at most major banks and other financial institutions drops to 5.95%, which will lower interest costs for variable-rate mortgages as well as personal and home equity lines of credit (HELOCs).

For floating variable-rate mortgages, monthly payments will decrease along with the prime rate. In contrast, those with fixed-payment variable-rate mortgages will see more of their payments go toward the principal as interest costs drop.

Fixed-rate mortgages are not impacted by changes to the Bank of Canada’s policy rate, as their interest rates are locked in for the duration of the term.

BoC economic forecasts remain largely unchanged

In its latest quarterly projections released in its Monetary Policy Report, the Bank of Canada made only minimal adjustments to its GDP and inflation forecasts, despite some recent economic surprises.

Even though third-quarter GDP growth came in well below expectations—1.6% versus the anticipated 2.8%—the Bank maintained its overall growth outlook for both 2024 and 2025, suggesting it expects stronger growth in other quarters to make up for the miss.

“GDP growth is forecast to strengthen gradually over the projection horizon, supported by lower interest rates,” the Bank said in its statement. “This forecast largely reflects the net effect of a gradual pick up in consumer spending per person and slower population growth.”

On the inflation front, the Bank slightly lowered its headline inflation forecast, cutting it by 0.1% for this year (to an annualized rate of 2%) and by 0.2% for 2025, bringing it to an annualized rate of 1.8%.

“The Bank expects inflation to remain close to the target over the projection horizon, with the upward and downward pressures on inflation roughly balancing out,” the Bank said.

More rate cuts to come

The Bank of Canada also signalled that further rate cuts are likely, though the timing and size of future reductions will be driven by economic data.

In its statement, the Bank said, “the timing and pace of further reductions in the policy rate will be guided by incoming information and our assessment of its implications for the inflation outlook. We will take decisions one meeting at a time.”

Markets are currently pricing in odds of a follow-up 25-bps rate cut at the Bank’s December 11 policy meeting. Whether the Bank will feel compelled to deliver another ‘supersized’ 50-bps rate cut will depend on key economic data released between now and then, including October and November’s jobs reports, inflation readings, and other indicators of economic health.

Scotiabank economist Derek Holt says another half-point rate reduction isn’t out of the question but noted that it’s still too early to make any firm predictions.

“I don’t have a view on the size of the next move in December at this point, but I would not just assume that this is a one-and-done upsizing,” he wrote. “Our published forecast implies a quarter-point move, but isn’t worth much at this stage before we get a LOT of data between now and then.”

What should borrowers do?

For those with variable-rate mortgages, adjustable-rate mortgages, and other loans tied to the prime rate, today’s rate cut is welcome news. If you’re considering a mortgage, have a variable rate, or are approaching renewal, it’s a great time to review your strategy.

A mortgage broker can help you navigate these changes and find the best option based on your personal financial situation.