Bank of Canada makes its first rate cut in four years, to 4.75%

On June 5, 2024, the Bank of Canada reduced its target for the overnight rate by 0.25 percentage points to 4.75%, with the Bank Rate at 5% and the deposit rate at 4.75%. It was the first cut since March 2020, after the rate had been held at 5% since July 2023.

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Why the Bank cut

• CPI inflation eased to 2.7% in April, and core measures slowed with continued downward momentum.
• First-quarter GDP grew 1.7%, slower than forecast. Consumption grew about 3%, and housing activity increased.
• Shelter price inflation remains high.
• “Monetary policy no longer needs to be as restrictive,” Governing Council agreed.

What it means for Calgary

Variable-rate borrowers see a small payment drop right away. More important for the market, the cut signals the direction of rates, which may bring waiting buyers back during a busy summer. The next decision is on July 24, 2024.

What changed since April

In April, the Bank held at 5% and said it wanted evidence that the downward momentum in inflation would be sustained. By June it had that evidence. CPI inflation eased from 2.8% in February to 2.7% in April, the Bank’s preferred core measures slowed, and three-month measures pointed to continued downward momentum. Measures of how broadly prices are rising across the CPI basket fell further and are now near their historical average. “Recent data has increased our confidence that inflation will continue to move towards the 2% target,” the Bank said.

The economy behind the decision

Canada’s economy grew again in the first quarter after stalling in the second half of 2023, but the 1.7% pace was slower than the April forecast, mainly because of weaker inventory investment. Consumption grew about 3%, and business investment and housing activity also rose. Businesses are still hiring, though employment is growing more slowly than the working-age population, and wage pressures appear to be easing gradually. Overall, the Bank said the economy is still operating in excess supply. Globally, oil prices averaged close to its assumptions.

The Bank’s caution

The Bank stressed that risks to the inflation outlook remain and that it is closely watching core inflation, the balance between demand and supply, inflation expectations, wage growth and corporate pricing. It also continues balance sheet normalization. A first cut does not guarantee a quick series of cuts.

What it means for Calgary buyers and sellers

The cut arrives as Calgary’s market begins to loosen slightly. CREB reported 4,333 new listings in May, up almost 19% from last year, while the benchmark price reached $605,300. Lower borrowing costs could bring back buyers who had paused, especially in the lower price ranges where demand is strongest. Fixed mortgage rates follow bond yields rather than the overnight rate, so they may already reflect some of the expected cuts.

How big is the change?

A quarter-point cut is modest. On a variable-rate mortgage, it lowers the interest portion of payments slightly, and the effect grows only if more cuts follow. For many Calgary households who renewed or bought at much higher rates over the past two years, the more important signal is the change in direction: after nearly a year at 5%, the Bank has started to ease. The next full Monetary Policy Report on July 24 will show whether the Bank expects inflation to keep falling as it forecast in April.