With rates near zero, the Bank of Canada is almost out of rate ammunition.
To go any lower, the Bank would have to do what it’s never done before, cut to 0%.
It decided against that today, leaving the country’s key lending rate unchanged at 0.25%. Below is how economists feel about that, with thoughts that may help your mortgage decision-making.
On the Economy’s Outlook
The Bank of Canada has given up on making economic predictions. It says the outlook is “too uncertain at this point to provide a complete forecast.”
In its statement, the Bank did say, however, that it expects GDP to drop as much as 30% in the second quarter, compared to the end of 2019. It also sees CPI inflation near 0%, a stunning change that reeks of potential deflation (one of the market’s worst nightmares).
“I find it quite notable that a crack forecasting team like the Bank of Canada has sort of thrown up their hands a little bit, and suggested they just can’t make a realistic call on the economy given the degree of uncertainty that surrounds the outlook at this point,” said BMO chief economist Doug Porter. “I think that’s quite a statement.”
Relevance to mortgage shoppers: For anyone trying to guess where rates are headed, consider this. If the BoC can’t do it reliably, who can?
“There may not be a traditional forecast here, but the Bank's messaging is clearly 'buckle your seatbelts.' Even in its optimistic scenario, the Bank of Canada foresees an unprecedented economic shock,” said Brian DePratto, Senior Economist, TD Economics.
“Those of us who have to present forecasts for the economy can sympathize with the Bank’s decision to not provide a specific outlook,” noted Avery Shenfeld, Chief Economist, CIBC World Markets. Rather, the monetary policy report illustrates two divergent scenarios, both quite weak in the near term, but showing a difference of about a year in terms of getting back to the pre-recession trend level of output.”
Relevance to mortgage shoppers: Chances of a quick rate rebound appear minimal.
On Negative Interest Rates
Even though financial markets are still pricing in a 1-in-3 chance of a fourth BoC cut by year-end, Governor Stephen Poloz reaffirmed that the Bank has no plans to lower its key lending rate any further. The Bank says it considers the current 0.25% interest rate its “effective lower bound.”
“One tool the BoC doesn't sound keen to use is negative interest rates,” says Josh Nye, Senior Economist, RBC Economics. “And while Governor Poloz has been vocal in his concerns about negative rates, the fact that other central banks are also shying away from that tool suggests Poloz's successor is unlikely to suddenly embrace it.”
Relevance to mortgage shoppers: It doesn’t matter as much if rates do or don’t go negative. If you can save over 50-75 bps on your mortgage rate versus a 5-year fixed, that’s a meaningful head start versus a long-term fixed. You have to assume rates will increase over the next five years, but it's your weighted average interest rate that really matters, and a near-0% Bank of Canada rate will pull down that average for many quarters.
On the BoC’s New “Liquidity Measures”
The Bank of Canada also announced new plans to support credit markets, by buying provincial and corporate debt, buying more Treasuries, among other things. "This helps ensure that households and businesses continue to have access to the credit they need to bridge this difficult time, and that lower interest rates find their way to ultimate borrowers," the BoC said.
“Overall, the Bank’s fresh action today, after only starting quantitative easing (QE) a couple of weeks ago, suggests that it is following Governor Poloz’s earlier analogy, that nobody would criticize a firefighter for throwing two much water on the flames. We agree,” added Shenfeld.
Relevance to mortgage shoppers: Financial markets agree too. With risk premiums in the bond market falling — lenders' costs of capital decline. When lenders pay less, borrowers eventually pay less, all else equal. That implies better fixed and variable-rate discounts to come.