Bank of Canada drops overnight rate by 50 basis points for first time since pandemic

Good news for those looking to take out a loan or a mortgage. 

The Bank of Canada has made yet another cut to its overnight rate. This latest cut is twice the size of the previous cuts at 50 basis points, or 0.5%. 

As of Wednesday, October 23rd, the current overnight rate is now 3.75%. 

The last time the bank made a cut this size was during the onset of the COVID-19 pandemic, on March 27th, 2020.

The overnight rate is the rate at which banks and other financial institutions borrow money at, which impacts Canadians when they take loans or mortgages. 

In plain terms; the higher the overnight rate, the higher the rate of interest banks pay the Bank of Canada, the higher interest rates Canadians will pay when they borrow. 

The Bank of Canada raises or lowers this rate in an effort to either encourage or deter spending to control the rate of inflation. 

According to the national central bank, inflation in advanced economies has declined over the past few months, and is now around central bank targets, which prompted the recent overnight rate cut. 

The Bank says that in Canada, the economy grew at around 2% in the first half of the year and is expected to grow by 1.75% in the second half. 

“Consumption has continued to grow but is declining on a per person basis,” said the Bank of Canada in a media release.  

“Exports have been boosted by the opening of the Trans Mountain Expansion pipeline.” 

In terms of the labour force in Canada. The Bank of Canada says although the unemployment rate was 6.5% in September and hiring has been modest across the board, population growth has been expanding the labour force. 

Residential investment is expected to grow in the coming months as there is an ever-increasing demand for housing throughout Canada and business investments are expected to grow parallel to demand, according to the Bank. 

In terms of Gross Domestic Product (GDP)—the monetary value of final goods and services—the Bank forecasts growth of 1.2% in 2024, 2.1% in 2025, and 2.3% in 2026.

Additionally, the Consumer Price Index (CPI), which dictates inflation rates, has declined significantly from 2.7% in June to 1.6% in September. 

Despite this, the Bank says inflation in shelter and housing costs remains elevated but has begun to ease. 

Another big factor in the CPI coming down significantly is the drop in global oil prices which has led to lower gasoline prices. 

The Bank of Canada will be trying to keep the inflation rate below 2.5% over the coming months, and expects it will remain so. 

If the inflation rate continues to drop, as the Bank has forecasted, they say there may be another cut to the overnight rate in the coming months. 

The next possible cut to the overnight rate will be December 11th.