What Did They Do?
Today, the Bank of Canada held the overnight lending rate at 1.25%. They recently raised it by 0.25% on each of January 17th, 2018, and September 6th and July 12th, 2017. Prior to that it had remained stable at 0.50% since July 15th, 2015.
What Does the Bank of Canada Affect?
First, it’s important to note that the Bank of Canada doesn’t control the “Prime” rate, which is a rate that financial institutions use to set variable rate mortgages, among other lending such as lines of credit. Rather, the Bank of Canada controls the “overnight lending rate,” which is a rate that the banks use to set their “Prime” rate. So, while the Bank of Canada’s decisions affect the “Prime” rate, it’s an indirect effect.
Why Do They Affect It?
When the Bank of Canada (BOC) meets approximately 12 times per year to review rates, they’re evaluating the condition of the overall Canadian economy. In simplest economic terms, the BOC wants to encourage or stimulate the economy when it’s slow, to ensure things don’t slow too much; or, conversely, when the market is inflating, hot, or growing too fast, they want to slow things down a little to ensure the inflation doesn’t get out of control. Good, sustainable economics is about predictability; businesses operate best when they’re confident they can predict the market and make decisions looking forward. If the BOC can operate to create that predictability, keeping things from getting too cold or too hot, they’ll promote that sustainable, moderate growth which maintains stability.
Does This Affect My Mortgage?
If you have a variable rate mortgage, it’s going to affect you in the short term; either your rate, modified against Prime, will stay stable, increase, or decrease with each review by the BOC. If your mortgage is on a fixed rate, the overall economic situation will affect your rate when you renew your mortgage or look at refinancing down the road.
Why Did They Hold Tight This Time?
The Canadian economy had surprising growth in 2017, but there are indicators that 2018 is slowing down a little. Some softer numbers in job growth early in the year along with international trade uncertainty – particularly with the US, and Trump’s unpredictability with NAFTA and import tariffs – have led to businesses hesitating to make decisions, taking more of a “wait and see” approach. If they’re waiting to see, they’re not hiring, which means less people are working, which means less people are spending their paycheques, which means other businesses have less revenue, which means less taxes collected, and the cycle continues. So, the Bank of Canada wants to keep rates low to encourage businesses to borrow money to invest and grow, as well as ensuring their costs don’t rise unexpectedly forcing them into hardship, and potentially laying off employees – which could create a negative cycle itself.
What’s Going to Happen in the Future?
Overall, it’s expected that in the next few years there will be positive growth and rates will rise accordingly. That said, it’s not expected to spike out of control, and the Bank of Canada won’t raise the overnight lending rate unless they believe it’ll be, overall, the right decision for the Canadian economy. Crystal balls have a poor track record of being dependable, but watching overall economic growth, including job number reporting, can give clues.
As a mortgage brokerage, we have an obligation to ensure that the product or service we’re recommending is suitable for every client. Risk averse clients, or clients who don’t have much wiggle room in the budget, shouldn’t normally choose a variable rate; fixed rates can offer more stability and future known costs. Each client is unique, however, both in terms of situation and tolerance, and we’re committed to ensuring we treat you as such.