Bank of Canada Rate Cuts: Key Takeaways
The Bank of Canada's third rate cut of 2024: the reasons behind the decision and what it changes for your finances.
On September 4, 2024, the Bank of Canada announced its third interest rate cut of the year, lowering the policy rate to 4.25%.
Reasons for the rate cuts:
- Easing inflationary pressures: Inflation in Canada fell to 2.5% in July, the lowest level since March 2021. This is a significant decrease compared to previous months, indicating an easing of inflationary pressures. The Bank of Canada aims to keep inflation around 2%, and the rate cut is intended to support this trend
- Economic slowdown: The Canadian economy grew by 2.1% in the second quarter of 2024, a result slightly above the Bank’s July forecast. However, preliminary data suggest that economic activity slowed in June and July. Employment remained stagnant with little change, and although wage growth is high, it has not translated into increased productivity. The rate cut aims to stimulate economic activity by encouraging borrowing and investment during this period of weak economic performance.
- Global economic conditions: Since July, global financial conditions have eased with a decline in bond yields, generally indicating lower borrowing costs and a more accommodative financial environment. The Canadian dollar appreciated modestly, reflecting a weaker US dollar. Oil prices were lower than previously forecast, influencing inflation and economic conditions. The Bank of Canada’s rate cut was partly a response to these global trends, aiming to align domestic monetary policy with improved global financial conditions and to support overall economic stability.
How does this rate cut affect GICs and high-interest savings accounts & why could mortgage real estate investment trusts be an attractive alternative?
GICs & High-Interest Savings Accounts:
Guaranteed investment certificates (GICs) and high-interest savings accounts offer returns closely tied to interest rates. When rates fall, the returns on these products generally decrease as well, because they offer fixed returns directly linked to prevailing interest rates. We are seeing it right now: GIC rates have come down as the Bank of Canada has cut its policy rate. Here is an example of the GIC rates currently offered at Manulife.
Mortgage real estate investment trusts:
A real estate investment trust (REIT) is an entity that finances, manages or owns income-producing real estate properties. It offers retail investors the opportunity to access the real estate market without needing to own physical property. REITs diversify their investments across different types of real estate assets.
REITs can be an attractive alternative when interest rates fall. Lower borrowing costs can increase the profitability of REITs, as they can acquire and manage properties at a lower cost. REITs often offer higher returns compared to traditional savings products. According to Investopedia, REITs can provide stable income and diversification benefits, making them an attractive investment during periods of falling interest rates.
See an example of a mortgage REIT
Given the impact on GICs and high-interest savings accounts, exploring REITs could offer better returns and higher growth potential.
If you would like to discuss further, don’t hesitate to book an appointment!
Sources: Bank of Canada & Investopedia
