What you need to know about a possible interest rate cut

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On Wednesday, all eyes will be on Bank of Canada Governor Tiff Macklem, as many Canadians feeling the pinch from higher interest rates await the central bank’s decision on its policy rate. Many economists believe conditions are right to see the bank start cutting its key lending rate that has remained at five per cent since July 2023. Here’s everything you need to know about the bank’s upcoming decision.

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WHAT IS THE BANK OF CANADA’S KEY RATE AND HOW DOES IT IMPACT THE ECONOMY?

Interest rates are one of the main tools used by the Bank of Canada to stimulate or slow the economy. The interest rate set by the central bank impacts the interest rates consumers get charged on loans such as mortgages and lines of credit. Higher interest rates make it more expensive for businesses and individuals to borrow money and service their debts, resulting in less money available to spend on other services and products. Ideally, this combination discourages spending and helps bring down demand for goods and services, helping control price increases.

WHY DID INTEREST RATES GO UP IN THE FIRST PLACE?

The Bank of Canada began increasing interest rates in March 2022 in response to rising and persistent inflation fuelled by the lifting of restrictions after COVID-19, a time during which Canadians saved a lot of money and were then willing to spend it; the war in Ukraine, which led to higher gas prices; and supply chain issues and shortages of certain products. This also happened at a time when the economy was overperforming, adding thousands of jobs while employees earned higher wages. In all, the central bank raised its key interest rate from 0.25 per cent in 2022 to today’s five per cent.

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WHAT IS THE LATEST ON INFLATION?

One of the reasons many economists anticipate the Bank of Canada will start cutting interest rates is because inflation has eased considerably in the past few months. The annual inflation rate for April was 2.7 per cent, down from March’s reading of 2.9 per cent. That’s a lot closer to the bank’s ideal rate of inflation of two per cent and lower than its peak of 8.1 per cent in June 2022.

WHAT IMPACT HAVE THE INTEREST RATE INCREASES HAVE HAD ON THE HOUSING MARKET?

Before the central bank began raising interest rates, London was among the hottest housing markets in the country, breaking sale figures almost every month while home prices rose to new heights. Since then, however, the market has cooled, settling into what realtors describe as a balanced market. This has resulted in home prices coming down as demand has slowed; homes also are staying longer on the market, selling closer to asking prices and new listings are rising.

WILL A CUT IN INTEREST RATES REIGNITE LONDON’S HOUSING MARKET?

Yes and no. A cut by the Bank of Canada could give confidence to buyers to jump back into the market. However, most economists anticipate an interest rate decrease of only 0.25 of a percentage point. This means affordability will remain an issue as many first-time home buyers will still have a hard time qualifying for a mortgage. Analysts believe several more cuts will be needed for demand to rise significantly and bring more people into the market.

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