The Bank Of Canada Kicks off January With A Rate Hold

Guest-written by: Penelope Graham, Zoocasa.

Good news for variable-rate mortgage and line-of-credit borrowers: your payments won’t be changing in the near term, as the Bank of Canada opted to leave its trend-setting interest rate alone in its first rate announcement of the year.

The central bank, which sets the trend for consumer lenders’ pricing with its Overnight Lending Rate, left it at 1.75%, where it has remained since October of last year following three rate hikes over the course of 2018.

Lower Oil Prices Impacting Rate Decision

It has been widely expected that 2019 would usher in several more rate increases, as the Bank of Canada has indicated it wants to eventually reach a range of 2.5 – 3.5% – a “neutral” interest rate that will neither boost or slow inflation. However, lower-than-expected oil prices have derailed those plans, chopping expectations for economic growth and forcing the BoC to lower its forecast for the year.

“Global benchmark prices for oil have been about 25 per cent lower than assumed in the October Monetary Policy Report (MPR). The lower prices primarily reflect sustained increases in US oil supply and, more recently, increased worries about global demand. These worries among market participants have also been reflected in bond and equity markets,” stated the BoC in its release.

It now calls for global growth to drop to 3.4% this year from 3.7% in 2018, and that Canadian GDP will only increase by 1.7% this year – 0.4% lower than what was previously predicted.

Other risks facing the economy include growing tensions around U.S.-China trade conflicts, as well as a slowing housing market – new mortgage rules, foreign buyer policies and higher interest rates have slowed the pace of consumer investment and housing spending, says the Bank.

Downturn Won’t Last Long

However, the Bank of Canada remains optimistic that softer economic performance will be temporary.

“These developments are occurring in the context of a Canadian economy that has been performing well overall,” it states. “Growth has been running close to potential, employment growth has been strong and unemployment is at a 40-year low. Looking ahead, exports and non-energy investment are projected to grow solidly, supported by foreign demand, the CUSMA, the lower Canadian dollar, and federal tax measures targeted at investment.”

It’s expected that Canada’s economic growth will recover to 2.1% by 2020, with inflation returning to its forecasted target of 2%.

Higher Rates May Still Come in 2019

While borrowers may be getting a temporary reprieve, the BoC made it clear that it still intends to hike rates this year to keep inflation in line, once risks facing the oil sector start to fade. “Weighing all of these factors, Governing Council continues to judge that the policy interest rate will need to rise over time into a neutral range to achieve the inflation target. The appropriate pace of rate increases will depend on how the outlook evolves, with a particular focus on developments in oil markets, the Canadian housing market, and global trade policy,” it states.

How Borrowers Are Affected: A Competitive Mortgage Rate? 

This means, if you’re currently shopping for a competitive mortgage rate or other market-linked loan, the interest rates currently available may be more attractive than what’s to come later in the year.

It also means those currently holding a variable-rate mortgage won’t see any fluctuation in their payments, or the amount going toward their debt principal, in the short term; because consumer lenders take their cue from the BoC when pricing their variable-rate products, this announcement has given them no reason to change their pricing.

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, from Toronto to Calgary homes for sale and Edmonton real estate. Home buyers and sellers can browse listings on the site, or with Zoocasa’s free iOs app.