The Bank of Canada has lowered its key interest rate by a quarter of a percentage point to 4.75 per cent, the first cut in more than four years. Here's what it could mean for your finances.The Bank of Canada's benchmark rate affects borrowing costs for banks, which means they're able, but not forced, to lower their own lending rates.
From the mid-1990s to 2008, the added margin averaged around 1.5 per cent. It rose to 1.75 per cent until around 2015, and since then has stood at around two per cent added to the bank rate. If banks move their prime rate down, it will have an immediate effect on borrowers with variable-rate mortgages, just as they've felt the brunt of rising rates.
Bank of Canada governor Tiff Macklem did say it's "reasonable" to expect further cuts, but that the bank is making its interest rate decisions one at a time. The relationship between borrowing costs for financial institutions and savings rates isn't strictly linear though, said Shannon Terrell, a personal finance expert at NerdWallet. But banks generally move down savings rates to compensate for the lower lending rates they're offering.
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