There was no change today from the Bank of Canada (BoC) – the central bank has opted to leave the cost of borrowing at status quo in the second scheduled rate announcement of the year. The overnight lending rate remains 0.5 per cent, with the bank rate at ¾ per cent, and the deposit rate at ¼ per cent.
While it was widely expected that there would be no change in today’s announcement, all eyes are on the BoC’s language and whether it alludes to an improving economy. The central bank indicated that while GDP growth in the fourth quarter of 2015 was better than expected, “low level of oil prices will continue to dampen growth in Canada and other energy-producing exports.”
It also expects inflation to be slightly subdued in the months to come, as “the factors that pushed total CPI inflation to up to 2 per cent will likely unwind in the months ahead.” Given current recovery conditions, we likely won’t witness a trend-setting rate hike for quite some time.
The Pros and Cons of Cutting Rates
Rates may not be rising any time soon, but the BoC is being extremely cautious about its measures to boost the economy. Cutting rates at this time would have both a positive and negative impact. Doing so would put further downward pressure on the loonie – not great for consumers but a big boost for the exports sector, which must pick up the slack during oil’s downturn.
However, lowering the cost of borrowing would further fuel rising household debt levels which Governor Stephen Poloz recently highlighted as a major risk facing economic recovery. Lower mortgage rates will do little to temper the rising cost of housing in Canada’s largest urban markets, and could prime homeowners for disaster should the economy turn around and rates rise; millions could find themselves underwater on their mortgages, which could lead to defaults on a mass scale. States the Bank, “Meanwhile, financial vulnerabilities continue to edge higher, in part due to regional shifts in activity associated with the structural adjustment underway in Canada’s economy.”
The last rate cuts occurred in January and July 2015 in response to the sharp drop in oil prices.
A Wait-and-See Approach
The Bank of Canada’s monetary policy is a main tool used to support the economy – but it’s not the only one. Fiscal policy – spending stimulus provided by the Federal government – can also impact economic growth. As the Liberals are set to reveal their Federal budget spending plan on March 22, the BoC is waiting to see how those measures will impact the economy before taking further action of their own. The Bank will release their assessment of the new spending measures in their upcoming April projection. In January, the BoC slashed their growth projection from 2 per cent to 1.4 per cent. It will be interesting to see if this forecast changes once stimulus takes effect.
Related Read: Can Fiscal Policy Save the Economy?>
What Does This Mean for Mortgage Rates?
The Bank of Canada’s Overnight Lending Rate sets the cost of borrowing between the banks, which lend and borrow from each other constantly in order to keep funds liquid. When borrowing is cheap for the banks, the discount is generally passed down to consumers in the form of lower variable rates. Because there was no change in today’s announcement, current variable mortgage rates will – theoretically – not change. The Prime rate offered by Canada’s big lenders will likely remain at 2.70 per cent, and current variable borrowers will see no change in their monthly payments.
The good news is mortgage rates have been offered at steep discounts for some time – and that both fixed and variable offerings will remain competitively priced, according to our expert Mortgage Rate Outlook Panel Forecast.
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The next Bank of Canada interest rate announcement and release of the Monetary Policy Report will be April 13, 2016.