Bank of Canada cuts lending rate

Key Takeaways: The Bank of Canada (BoC) just cut its lending rate by 50 basis points, bringing it down from 3.75% to 3.25%The central bank has cut its lending rate by a total of 175 basis points since it began its easing cycle in June, with more interest rate reductions likely on the way in 2025, according to TD Economics Whenever the BoC cuts its lending rate, it can become cheaper for Canadians to borrow money

In its final rate announcement for 2024, the Bank of Canada (BoC) opted to lower its lending rate by 50 basis points, bringing it down to 3.25%.

The cut matches the central bank’s October decision and signals that the BoC may be concerned about Canada’s slowing economic growth. Many market participants believed the BoC would reverse course back to a 25 basis points cut as recent inflation data showed a moderate acceleration. Still, inflation is around the BoC’s 2% target.

“The decision to cut by 25 or 50 basis points started skewing toward the latter after recent job market numbers showed Canada's unemployment rate hitting a three-year high," said TD Economist Marc Ercolao.

"The Bank of Canada has stressed in recent meetings that it is concerned about weakening economic growth, so lowering rates at a faster pace can be viewed as a hedge against inflation falling too low below target."

In its announcement, the BoC said: "With inflation around 2%, the economy in excess supply, and recent indicators tilted towards softer growth than projected, Governing Council decided to reduce the policy rate by a further 50 basis points to support growth and keep inflation close to the middle of the 1-3% target range."

What this December rate cut could mean for Canadians

Any time the central bank makes a change to its lending rate, it can impact borrowing costs.

The BoC’s lending rate influences the interest rate banks charge customers on financial products such as loans and mortgages. So, when the BoC cuts its lending rate, it can become cheaper for Canadians to borrow money.

For Canadians with variable rate mortgages, rate cuts can mean more of their money goes toward the principal on their mortgage, and less towards interest.

For Canadians with fixed rate mortgages, this recent BoC rate cut will not immediately make an impact. Fixed rate mortgages are based on five-year bond yields, Ercolao said, and financial markets have already been expecting the BoC to cut rates this year. Those expected cuts are, to some degree, already factored into bond yields, and are therefore reflected in current fixed mortgage rates.

Rate cut predictions for 2025

The BoC is taking a rate announcement break over the holidays but will return on January 29. In total, the central bank is set to make eight rate announcements in 2025.

Ercolao and his colleagues at TD Economics believe there will be more rate cuts in the new year and expect the BoC’s lending rate to be cut down to 2.25% by the end of 2025.

“We've penciled in another 100 basis points of easing in 2025, but in our opinion the outlook for 2025 is marked with uncertainty,” said Ercolao.

"President-elect Donald Trump's proposed policies will have spillovers north of the border, especially if he follows through with 25% across-the-board tariffs on Canadian exports. Domestically, the Canadian consumer is finding some momentum, which could mean less aggressive easing by the Bank of Canada."