Penelope Graham • Mar 03, 2019
If you’re a variable-rate mortgage holder or a regular reader of business news, chances are you’re familiar with the Bank of Canada rate announcements. The Bank of Canada (BoC) is the national interest rate and currency regulator that’s frequently in the headlines, especially when one of its interest rate announcements is imminent.
For those not as well-versed in the world of monetary policy, it may not be clear why these regular announcements prompt widespread fascination and speculation, all the way from panels of economists to your next-door neighbour. That’s because the BoC’s movements have financial implications for everyone, regardless of their mortgage typeor investment portfolio.
The main role of the BoC is to safeguard our national currency by protecting its ability to “float” higher or lower depending on market factors, and by setting a target rate (currently 2%) for inflation growth to keep it “low, stable, and predictable”.
One of the main methods used by the BoC to keep inflation on track is by manipulating interest rates – also referred to as monetary policy – for both lenders and consumers. It does this via the tweaking of its Overnight Lending Rate, which it does eight times per year, in a federal Interest Rate Announcement.
This rate, which is currently 1.75%, sets the cost of borrowing for the overnight loans Canada’s banks make to each other, a practice that’s key to keeping funds liquid among lenders and credit accessible to borrowers. When the Overnight Lending Rate is lower, banks pass the savings onto their variable lending products, such as variable-rate mortgages and lines of credit. The opposite occurs when the rate is hiked, meaning everything from auto loans to home financing gets more expensive in a rising rate environment. Variable mortgage holders specifically may see their monthly payment increase after a rate hike or more of their payment going toward interest rather than their principal debt. For this reason, it’s wise for them to keep a close eye on monetary policy trends – but being in the know on the BoC is beneficial for all Canadians as it offers insight into the overall health of the economy, and the current risks posed to investors and borrowers.
The direction the BoC decides to take with rates is a direct reflection of today’s economic state; a threat of a recession or other industry-related downturn will prompt it to cut its rate in efforts to encourage liquid borrowing and stimulate the economy. For example, following the global recession in 2008, the BoC slashed its rate as low as 0.25% and returned it to 1% as things stabilized in 2010. There it remained until 2015, when plunging oil prices caused cuts in January and July to 0.5%. An improving jobs market and strengthening trade, however, prompted five hikes over the course of 2017 and 2018 to the current 1.75%. And, while the BoC hinted more were to come this year, more trouble in the oil patch has put it back in a holding pattern for the foreseeable future. Other factors on the BoC’s radar include job market strength, the level of risky household debt, the housing market, as well as geopolitical and economic risks to our trade industry.
The American counterpart to the BoC, the U.S. Federal Reserve, sets the cost of borrowing south of the border and is perhaps the strongest influencer on Canadian monetary policy outside of our own economic fundamentals. That’s due to our strong trading partnership with the U.S., and its impact on the Canadian Dollar; keeping our interest rates low when the U.S hikes theirs can put too much downward pressure on the loonie. For that reason, the two central banks tend to move in lockstep; in fact, when the BoC last strayed from the U.S’s rate path in 2016, it was due to abnormally slow domestic economic growth and marked the first divergence since 2007.
One of the biggest benefits of understanding monetary policy is that it can help borrowers make informed decisions about their mortgage and loan choices. Because variable rate prices are tied directly to the BoC’s movements, they’re a more volatile (though historically cheaper) type of mortgage, which may or may not be a fit for everyone’s risk appetite. Those shopping for a mortgage or other loan when interest rates are on the rise may prefer to get a fixed rate instead, the cost of which won’t change throughout the term. Understanding the current interest rate environment is also helpful when your term comes up for renewal – if interest rates are low, it can be a good time to shop around for a more competitive product and save even more money in the long run.
It’s important to pay attention to the increase changes, as a change in the interest rate can affect many aspects of life as a Canadian. We hope you understand what you need to know about the Bank Of Canada rate announcements, so you can make informed decisions when it comes to your personal finances.
Starting the mortgage process? Check out the Borrowell Mortgage Coach to find the best mortgage for you based on your unique credit profile.
This post is guest written by Penelope Graham. Penelope is the Managing Editor at Zoocasa, a real estate brokerage that provides advanced online search tools and data to empower Canadians to buy or sell their homes faster, easier and more successfully. Home buyers can browse real estate listings on the website or the free real estate iOS app, including condos for sale in Toronto, and condos for sale in Vancouver.
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