Another rate cut

This morning, the Bank of Canada announced yet another rate cut, taking the overnight rate target down from 4.0% to 3.5%. This marks a departure from the conservative 0.25% cuts we've been seeing over the past few months. Assuming that the banks follow this move, this will take the prime rate down from 5.75% to 5.25%.

As with any rate cut, this is good news for borrowers, and bad news for savers. If you have revolving debt, then you will be paying less interest on it ($5 less per year on a $1,000 debt). However, you will also earn less interest on cash savings, since the online banks also lower their savings account rates when the BoC cuts its rate.

Here's a quick review of the BoC and bank prime rates over the past year:

• January 16, 2007 - BoC rate = 4.25%; bank prime = 6.00%


• July 10, 2007 - BoC rate = 4.50%; bank prime = 6.25%


• December 4, 2007 - BoC rate = 4.25%; bank prime = 6.00%


• January 22, 2008 - BoC rate = 4.00%; bank prime = 5.75%


• March 4, 2008 - BoC rate = 3.50%; bank prime = 5.25%

Of course, there's always the possibility that the banks won't follow suit with a cut to the prime rate, or that they may lower prime by less than 0.50%. This announcement marks the biggest single change to the BoC rate since 2001, so it will be very interesting to see what effect this has, on savings account rates, the stock market, and the Canadian economy at large.