Is a Bank of Canada Rate Cut Possible?

Is a Bank of Canada rate cut possible?

On the heels of dismal economic data released last week by Statistics Canada, economists and borrowers alike have been wondering: could the Bank of Canada be prompted to cut national interest rates even lower?

Given that growth expectations for 2012 came up short at only 1.8 per cent, and 2013 is also shaping up to show lacklustre progress, it’s looking less and less likely that we’ll see what has been an oft-forewarned interest rate hike by the BoC by late this year, as previously predicted. Instead, rates are looking to stay put into 2014 – but is it possible that a Bank of Canada rate cut could occur before then?

Lenders Pushing Mortgage Rates Low

While it hasn’t been since September 2010 that the Bank of Canada’s Overnight Lending Rate has changed from one per cent, that hasn’t stopped mortgage brokers and big banks from dipping lower and lower with their mortgage rates over the past two years. The spread between five-year fixed mortgage rates and five-year bond yields is closing in – as of today’s posting, only 124 basis points separate March 1st yields and the 2.79 per cent rate offered by Butler Mortgages. This is also likely to tighten amongst the big banks as well, as BMO reintroduced their 2.99 five year fixed today – a move that is sure to be countered by the rest of the Big Five.

Should Canada dip below though the sacred one per cent point, we’d be joining a rank of other industrialized countries with below-par interest rates such as the UK (0.25 per cent), the U.S. (0.25 per cent), European countries such as France and Spain (0.75 per cent), and Japan, sitting at dead zero.

The Dangers of Low Interest Rates

Operating with low interest rates puts a nation at risk for weak currency among the global markets, and cheap credit can set the stage for unsustainable levels of debt among its consumers. The Bank of Canada and Jim Flaherty have been warning Canadians for years against the dangers of carrying too much debt, and acquiring it at records lows. After all, what goes down must come back up! For example, home buyers locking into record low fixed rates may find themselves in a crunch should rates have hiked by their renewal – and variable customers could see their monthly mortgage payments spike immediately.

The Experts Weigh In

It’s this cautious climate that leads Dr. Ian Lee, Director for the MBA program at Sprott School of Business at Carleton University and member of’s Mortgage Rate Outlook Panel, to believe that an additional cuts to rates aren’t in the cards.

“I doubt the Bank of Canada would further reduce the central bank rate due to the Bank’s concerns over continued borrowing by consumers when consumer indebtedness is at record levels,” he says.

However, Dr. Lee also points out that any rate change, however nominal, is highly unlikely until GDP and inflation performance performs above the two per cent market.

“It is equally clear that the Bank of Canada will not increase the central bank rate when the economy is so weak,” he says.  “Thus, I concur with those economists who predict the Bank will set aside its “tightening bias.”


Related Topics

Economic News / Mortgage News

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