What Does the Bank of Canada do?
Eight times per year, the Bank of Canada (BoC) makes an announcement about their base lending rate based on data they have assessed about the current state of the Canadian economy. Any change to this rate indicates a possible change to corresponding rates, such as interest rates for mortgages and additional types of consumer loans. This is because the rate set by the bank will directly affect prime rates offered by banks and other financing lenders. For more information, our recent blog post breaks down four of the most frequently asked questions regarding the BoC.
Were there any Changes to the Interest Rate?
As expected, the Bank of Canada held the rate steady at 0.25 percent today after one scheduled and two unscheduled rate drops since March 4, 2020. When the central bank’s overnight lending rate is dropped, mortgage holders will generally see a corresponding decrease in their mortgage payments. However, the prime rate offered by lenders may not always drop by the same amount that the overnight lending rate does. The chart below details the prime rate versus the overnight lending rate for 2020.
What Information did the Bank Share about the Canadian Economy?
- Uncertainty over the outlook of the economy has prohibited the bank from releasing a full forecast today, however, preliminary analysis suggests:
- “The level of real activity was down 1-3 percent in the first quarter of 2020, and will be 15-30 percent lower in the second quarter than in fourth-quarter 2019.
- CPI inflation is expected to be close to 0 percent in the second quarter of 2020.”
- There was an unprecedented drop in employment rates in March, with over one million Canadians losing their jobs due to the widespread shutdowns of non-essential businesses. Lower oil prices are also a factor in the number of recent job losses.
- Over six million Canadians have applied for the Canada Emergency Response Benefit (CERB).
- In light of the evolving COVID-19 situation, both economic activity and employment levels have seen a sharp decline across the country. Measures recently taken by the Bank of Canada include:
- The Acquisition of Government of Canada Securities in the Secondary Market;
- The Commercial Paper Purchase Program (CPPP); and
- A decrease in the overnight lending rate by 1.5 percent
- Some new measures were also introduced by the central bank today to help stabilize the Canadian economy:
- The bank notes that it is ready to increase the level of purchases under the aforementioned acquisition of securities program as required;
- There will be a temporary increase in the amount of Treasury Bills acquired by the bank at auctions (up to a maximum of 40 percent);
- Development of a new Provincial Bond Purchase Program is underway, providing up to $50 billion to supplement its Provincial Money Market Purchase Program; and
- A new Corporate Bond Purchase Program was announced, with the bank acquiring up to “$10 billion in investment grade corporate bonds in the secondary market.” Both bond programs will move forward within the next few weeks.
- Enhancements to the banks term repo facility were also announced, which will allow funding for up to 24 months.
Recovery from the COVID-19 pandemic is dependent on the severity and duration of the outbreak across each region. Subsequently, improvements on a global scale are expected to be “protracted and uneven.”
Will there be any Interest Rate Changes in the Near Future?
The central bank considers 0.25 percent to be their effective lower bound, which means a further rate drop is not viable at this time. However, the bank did note that it will continue to monitor the effects of the global pandemic on the Canadian economy, and that it is ready to “adjust the scale or duration of its programs if necessary.” The next announcement is set for June 3, 2020.
How Can I Learn More?
For up-to-date information on interest rates and other mortgage news, you can follow us on Facebook or Instagram. Questions about today’s announcement? Leave a comment below, or contact our office and speak to one of our Mortgage Brokers today!