Penelope Graham • Dec 05, 2018
Guest written by Penelope Graham, Zoocasa
The Bank of Canada may have a reputation for being predictable – but it proved again that when it comes to interest rates and the economy, you can’t take anything for granted. The central bank has opted to leave its trend-setting interest rate at 1.75% this month, due to a sudden drop in oil prices and continued uncertainty over U.S. trade relations. It’s a sharp turnaround from the conditions that prompted a rate hike in October, and analysts’ expectations another would follow before the year is through.
As a result, the cost of Prime borrowing offered by consumer lenders will remain the same for the time being, while interest payments will stay stable for variable mortgage borrowers.
Oil Prices a Big Factor
As Canada’s oil and gas industry is a major driver of the economy, the central bank always takes its cue from its health when tweaking monetary policy, along with other indicators like inflation and GDP growth. With oil prices drastically down from October levels and the Albertan government temporarily cutting production in recovery efforts, the BoC was hesitant to add further fuel to the fire, citing “activity in Canada’s energy sector will likely be materially weaker than expected,” in its announcement.
It also points to a number of emerging trade conflicts and instability in global markets as a reason to keep rates at the status quo.
Bank Hints at Hikes to Come
Don’t get too comfortable, however – the BoC is still signalling that it intends to hike interest rates a number of times throughout 2019 in order to reach a “neutral” rate between the range of 2.5 – 3% – achievable in roughly five rate hikes, should it keep to its pace of a quarter point per announcement. “Weighing all of the developments, Governing Council continues to judge the policy interest rate will need to rise into a neutral range to achieve the inflation target. The appropriate pace of rate increases will depend on a number of factors. These include the effect of higher interest rates on consumption and housing, and global trade policy developments,” states the BoC’s release.
“The persistence of the oil price shock, the evolution of business investment, and the Bank’s assessment of the economy’s capacity will also factor importantly into our decisions about the future stance of monetary policy.”
How Will This Affect Lending Rates on Personal Loans?
Interest rates on personal loans depend on the individual’s credit history and credit score. However, borrowing from the big banks may become more expensive as rates in general increase in Canada in 2019. With consumer debt still a major vulnerability of the Canadian economy, some may consider a low-interest personal loan to consolidate debt.
How Will This Impact Mortgage Borrowers?
That the BoC is choosing to hold rates is good news for borrowers – for now. As variable mortgage and line of credit rates are directly influenced by the BoC’s rate, these loan holders won’t see any fluctuation on their payments in the near term.
It also means that the benchmark used to stress test borrowers won’t change for the time being; as of January 1, those taking out a new mortgage, or refinancing their existing one, must prove they can qualify for a mortgage with an interest rate as high as the BoC’s five-year benchmark rate rather than the much lower contract rate they’ll actually receive from their bank. This benchmark rate, which is based on the average posted rate from Canada’s Big Six banks, is indirectly impacted by these rate decisions, as consumer lenders hike their average rates along with the BoC.
Today’s announcement also indicates that the window of affordability for home buyers is getting narrower. With more hikes planned on the horizon, it will only get tougher to qualify for a mortgage, and applicants will receive smaller financing amounts. Those on the fence about purchasing homes for sale are wise to lock into their pre-approvals now, as it is widely expected the BoC will continue its upward trajectory on interest rates in 2019.
Penelope Graham is the Managing Editor of Zoocasa.com, a real estate website that combines online search tools and a full-service brokerage to let Canadians purchase or sell their homes faster, easier and more successfully across the nation, including the Toronto, Calgary, and Vancouver MLS. Home buyers and sellers can also browse by home type, including houses, condos, and townhouses for sale by viewing listings on the site, or with Zoocasa’s free iOs app.
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