Lending Rate Stays at 1 Per Cent: Bank of Canada September Announcement

Lending  rates have remained the same For the 16th consecutive time the Bank of Canada is holding the lending rate at 1 per cent. The announcement extends what has already been a historically long period of super-low borrowing costs. Bank of Canada Governor Mark Carney says stronger growth is needed to warrant an interest rate hike, which now is expected to happen in mid 2013. This means Canadians holding a variable rate mortgage or a line of credit can sit easy at least for the next few months knowing their cost of borrowing will not be going up.

Carney says,” “Economic growth is expected to pick up through 2013, with consumption and business investment continuing to be its principal drivers, reflecting very stimulative financial conditions.” This hints that Canadians should at least start thinking about a higher cost of borrowing – and how it will affect their household budget. The biggest mistake most of us can make right now is to sit back and believe interest rates will remain this low for the long term.  Carney is looking for any excuse to get Canadians interest rates back on track and up from this ridiculous low rate.

What Could Trigger Higher Rates?

According to experts, the Canadian housing market is slightly overvalued, but still stable. Our growth has been tepid but steady, indicating Canada’s economy is moving in the right direction. The biggest problem remains our exporting industry – due to weak foreign demand it has suffered, ultimately leading to our sputtering economy.  If the world economy picks up, it could signal Canada’s ability to survive higher rates. Realistically, though, Carney won’t be in position to push interest rates forward until mid-to-late 2013 – and only if global conditions improve.

What Should Borrowers Do?

If you’re carrying debt, stay focused on paying it off; a lower interest rate means more of your payments are going towards the principal and your loan is being paid off faster. Don’t just service the debt by making minimum payments because they are so cheap – this will cost you a lot more when rates start to rise. If you are taking on more debt, calculate your affordability at a rate at least 3 per cent higher than what you’re paying. This will give you a realistic idea of how your payments could balloon.

What Should Investors Do?

The markets have not been kind to investors in the last few years. The ongoing global economic problems continue to rock financial markets around the world, including the Toronto Stock Exchange. There is cautious optimism in the statement released with the rate announcement “The economic expansion in the United States continues at a gradual pace,” it said. “Europe is in recession and its crisis, while contained, remains acute.” Canada continues to outperform other countries and oil and gas prices continue to rise giving a further boost to Canada’s economy. Canadian investors should try to keep their money working for them at home. The race to invest in emerging economies should be halted until the financial markets worldwide are calmer.

Where Are We Headed?

The bank has issued a new forecast and states conditions remain roughly in line with its July expectations, when it pegged growth in Canada at 2.1 per cent this year and 2.3 per cent in 2013. Canadians with high levels of debt should see this as an opportunity to pay off as much debt as possible before rates rise. Rates are low not because Carney and the Bank want them to be, but because they have no choice in the current economic climate. Don’t get stuck holding on to debt you could have paid down when rates start to rise.

Related Topics

Economic News / Mortgage News / Mortgages

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