Planning on applying for a mortgage, or renewing your existing one? You can count on stable interest rates to last, as the Bank of Canada has left the cost of borrowing unchanged in its most recent announcement. The central bank maintained its Overnight Lending Rate (the rate banks use when borrowing from each other and setting their own Prime and consumer variable rates) at 0.5 per cent, where it has remained since last July. The bank rate is correspondingly ¾ per cent and the deposit rate is ¼ per cent.
The BoC’s inaction isn’t a surprise – analysts widely expected that they would hold rates at status quo this month – but experts have been keen to comb through the language used by the Bank for clues to Canada’s economic health.
Related read: Sweet February Mortgage Rates to Stick Around
Slight Improvement – But Don’t Get Too Excited
While the nation experienced a “technical” recession last year due to oil’s decline, there have been slight economic rebounds in 2016. “Canada’s GDP growth in the fourth quarter was not as weak as expected, but the near-term outlook for the economy remains broadly the same as in January,” states the Bank. “Non-energy exports are gathering momentum, particularly in sectors that are sensitive to exchange rate movements.”
It’s a slight turnaround from the rocky conditions that plagued Canada in 2015 – but the Bank remains very cautious of its monetary policy, as growth and inflation are expected to underperform. “The factors that pushed total CPI inflation to up to 2 per cent will likely unwind in the months ahead,” stated the Bank. Given current recovery conditions, we likely won’t witness a trend-setting rate hike for quite some time.
A High-Debt Hazard
However, the Bank isn’t in any hurry to cut interest rates, as it did twice last year in response to oil’s sharp downturn. While lower rates will further weaken the loonie against the US Dollar – a benefit for our export industry – they’ll encourage Canadians to borrow at a time when household debt has hit new highs.
Governor Stephen Poloz has stated that highly indebted Canadians – specifically those with larger mortgages than they can handle – remain a top vulnerability; the percentage of Canadians with debt-to-income ratios exceeding 150 per cent has doubled over the last decade.
Waiting on Government Spending
The Bank is also waiting on new fiscal stimulus to be announced by the Liberal government; the huge infrastructure spending package Prime Minister Justin Trudeau campaigned on will finally be revealed on March 22. The spending may help boost economic growth, taking pressure off of the Bank and its monetary policy. The Bank will release their assessment of the new spending measures in their upcoming April projection. In the January announcement the BoC slashed their growth projection from 2 per cent to 1.4 per cent. It will be interesting to see if this forecast will change once stimulus takes effect.
How Will Mortgages Be Affected?
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 in the short to medium term.