Key points:
- Bank of Canada cuts interest rates for the first time in four years, signaling more to come.
- Canadian dollar (CAD) experiences mixed performance against other currencies following rate cut.
Homeowners across Canada are breathing a sigh of relief following the decision from its central bank to cut interest rates for the first time in four years. Such a move by the Bank of Canada (BoC) provides much-needed relief for households holding variable-rate mortgages.
While a single 25-basis point cut may not significantly impact the overall Canadian economy, it positively affects borrower sentiment.
For a home valued at CAD 703,446, a 5-year variable rate of 5.95% amortised over 25 years translates to a monthly mortgage payment reduction of CAD 96, or CAD 1,152 annually, due to the rate cut.
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BoC Senior Deputy Governor Carolyn Rogers emphasised that while housing is not the primary target, there is clear pent-up demand in the market. This rate cut, while aimed at broader economic stability, may indirectly stimulate housing market activity.
How the Canadian dollar performs in the currencies market
The Canadian dollar (CAD) showed mixed performance against other major currencies following the rate cut announcement. The CAD strengthened slightly against the US dollar (USD) as investors anticipated potential economic growth and increased consumer spending.
However, the CAD faced pressure against other currencies such as the euro (EUR) and the Japanese yen (JPY), as lower interest rates typically reduce the appeal of a currency to foreign investors seeking higher yields.
Picture: CAD declined against JPY as observed on the VT Markets app.
What may happen next to the CAD
The mixed performance of the CAD reflects cautious optimism regarding the economic outlook of Canada.
While the rate cut offers immediate relief to homeowners and may stimulate the housing market, concerns about global economic conditions and fluctuating oil prices, a key export for Canada, continue to influence the performance of the CAD.
