On January 29, 2025, the Bank of Canada lowered its key interest rate by 25 basis points, bringing it down to 3%. The prime rate was also reduced to 5.2%.

The Bank of Canada faced several pressures when making this rate cut decision:

• Inflation concerns: Although price increases have eased somewhat, inflation remains a key issue. Bank of Canada Governor Tiff Macklem has made it clear that future interest rate decisions will be highly dependent on the threat of tariffs and the impact of market uncertainty.

• Trade risks: The U.S. may impose tariffs of up to 25% on Canadian exports as early as February 1, which adds to the economic uncertainty. However, a prolonged trade conflict could lead to lower Canadian GDP and higher prices, posing a significant challenge for Canada’s economic recovery.

Impact of the Rate Change

• Reduced long-term loan burden: For those with variable-rate loans, the rate cut means the interest portion of their monthly payments will decrease, and the principal portion will increase. With each 25 basis point cut, the monthly payment on a $100,000 variable-rate mortgage would decrease by about $15. Over time, this can significantly ease financial pressure on households.

• Increased affordability for homebuyers: As rates drop, new buyers will see an increase in their borrowing capacity. While demand for new homes remains cautious, lower rates can boost confidence among some buyers, encouraging them to become more active in the market.

However, it’s important to note that these changes only apply to variable-rate loans. Borrowers with fixed-rate mortgages won’t feel the effects of the rate cut until their loans come up for renewal and need to be re-priced.

The Bank of Canada’s next decision on its policy interest rate will be announced on March 12.