Bank of Canada Rate Cut Gives Borrowers Hope, But Not Quick Relief, Analysts Say

The Bank of Canada building is shown in Ottawa in a file photo. The Canadian Press/Sean Kilpatrick

Homeowners won’t see mortgage costs fall much as a result of the June 6 interest rate cut by the Bank of Canada but, with the next central bank rate decision scheduled for July, borrowers may not have to wait long for some relief, say economists and analysts.

The central bank announced on June 5 it would lower its key interest rate by a quarter of a percentage point—the smallest decrease normally considered—to 4.75 percent from 5 percent, raising hopes among homeowners, small businesses, and other borrowers that interest rates are coming down.

The rate change was the first since July of 2023, when the central bank raised the rate to 5 percent, the last of a series of increases that pushed the rate up from historic lows.

But economists are warning borrowers not to expect much of an impact any time soon. Rates are still well above the 2020 level of 0.25 percent and anybody expecting a quick return to the era of cheap loans is likely to be disappointed, they say.

“The rate decrease won’t materially impact mortgage costs today, but the start of a downward trend may inspire new buyers to ramp up their home search efforts as confidence in the economy grows,” the Royal Bank of Canada said in a note to customers after the rate decrease.

The bank warned that people renewing their five-year, fixed-term mortgages may still find themselves longing for the borrowing rates of 2020, when the central bank’s key policy rate had dropped to 0.25 percent. People on variable-rate mortgages, though, could start to see some relief sooner.

“While the interest rate reduction is positive news for homeowners, many mortgage holders renewing in the next 6-12 months will still feel the impact of higher rates compared to their current mortgage term,” the Royal Bank of Canada said in a note to customers after the rate decrease.

Analysts interpreted comments made by the central bank on June 5 as a positive sign that more rate cuts are coming, but Bank of Canada Governor Tiff Macklem said the bank will be “closely watching” key indicators such as wage growth inflation and corporate pricing behaviour before further rate decisions.

“We’ve come a long way in the fight against inflation,” Mr. Macklem told reporters. “And our confidence that inflation will continue to move closer to the 2 percent target has increased over recent months. The considerable progress we’ve made to restore price stability is welcome news for Canadians.”

Canada’s inflation rate has fallen to 2.7 percent in April from 3.4 percent in December and “if inflation continues to ease, and our confidence that inflation is headed sustainably to the 2 percent target continues to increase, it is reasonable to expect further cuts to our policy interest rate,” Mr. Macklem said.

Still, TD Bank predicts further rate cuts will come quickly.

“We expect the BoC isn’t done,” TD economist James Orlando said in a note from his bank. “We have the central bank cutting twice more in 2024, before continuing the cutting cycle throughout 2025.”

“Now that the BoC has opted to make a cut to its overnight lending rate, all eyes are on the central bank’s next scheduled announcement about its interest rate, which is scheduled for July 24.”