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?
The Bank of Canada announced a 0.5% drop in the interest rate, bringing it down to 1.25 percent. This is the first rate change since October 2018. The Bank has been operating close to potential, with inflation on target, but has decided to drop the rate in response to the economic concerns of the COVID-19 virus. This decision comes after the U.S. federal reserve implemented a similar cut, as an emergency response, on March 3rd.
A drop like this one (0.5%) will either reduce your payment (on variable rate mortgages), or pay down more principal on adjustable rate mortgages. On an average mortgage, the savings could be over $80/month. As well, a lower Bank of Canada interest rate tends to reduce other interest rates, making borrowing easier.
What Information did the Bank Share about the Canadian Economy?
Prior to the virus outbreak, the global economy was showing signs of stabilizing.
As COVID-19 has posed a significant health threat, business activity in regions have fallen sharply, and supply chains have been disrupted.
The result of this unsettledness is a drop in commodity prices and a depreciation of the Canadian dollar.
The first quarter appears to be weaker than the Bank had expected, with economic activity being dampened by various other incidents across the country (rail blockades, teacher strikes, and winter storms, to name a few)
CPI inflation in January was stronger than expected, due to temporary factors.
Core inflation remains around 2 percent.
Will there be any Interest Rate Changes in the Near Future?
In light of the disruptions to the economy, the Governing Council stands ready to adjust the monetary policy further if required, to support economic growth and keep inflation on target. The Bank will be continuing to monitor the financial conditions. Forecasts speculate that today’s decision could be the first in multiple reductions to the Bank’s key interest rate. The next announcement is set for April 15, 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!