Despite inflation hitting 2 per cent in April, Bank of Canada Governor Stephen Poloz has maintained the key interest rate at 1 per cent in yesterday’s interest rate announcement. While some experts are still predicting a rate hike by the end of this year, the BoC’s current stance indicates it’s not yet confident enough to raise rates, despite stating that “financial conditions remain very stimulative,” in Canada. Here’s more on the announcement and what this means for mortgage rates.
Slow Global Growth
The Bank notes that the global economy continued to be weak in the first quarter of 2014. Canada was no exception. Growth was further slowed by the extreme winter weather we got this year. The Bank is confident that Canada’s economy will improve later this year as “The ingredients for a pickup in exports remain in place.” These ingredients include a lower dollar and a pickup in the U.S. economy, our biggest trading partner.
Downside Risk Remains
The latest numbers from April show the total Canada Price Index (CPI) was up to 2 per cent. But the Bank points out that the increase came mainly from energy prices. Core inflation, which strips out energy and food cost was still well below the target 2 per cent level. “Weighing recent higher inflation readings against slightly increased risks to economic growth leaves the downside risks to the inflation outlook as important as before,” the Bank says.
Household Debt Keeps Climbing
Canadians are still carrying a large debt load; the most recent numbers shows the ratio of debt-to-disposable income was at 164 per cent in the fourth quarter of 2013. This means, for every $100 a household makes, they owe $164. In comparison, in 1990 Canadians owed $90 for every $100 they made. The increase is largely due to mortgage debt, which is directly affected by any change in interest rates by the Bank. Governor Poloz and the Bank realize how fragile the household debt situation is in Canada saying in its statement, “the risks associated with household imbalances remain elevated.”
Persistent Low Rates Offer Opportunity to Pay Down Debt
There has never been a better time to pay down debt and prepare for higher rates, as every indication is rates will start to rise by the end of this year or early next year. By decreasing your loan amounts now, you’ll effectively make it cheaper to carry your debt when rates do increase.
Rising rates will also mean better returns on fixed income investment and that will be good news if you have extra money to invest at that time. Borrowing at ultra-low rates is very tempting but always remember that your re-payment plan has to be more aggressive when rates are low. Always pay your loan as if its 3 per cent more expensive, it will guarantee you can afford your mortgage when rates start to rise.
Stay tuned, the next scheduled date for announcing the overnight rate target is 16 July 2014.