If you follow us on social media, you may have noticed that we occasionally post about rate announcements from the Bank of Canada (BoC). There seems to be a lot of confusion about what the BoC actually does and what role they play within the Canadian economy, so we thought we would take the time to answer some frequently asked questions about Canada’s central bank.
What does the Bank of Canada do?
Ultimately, the bank’s number one goal is to protect the Canadian economy. They accomplish this by continuously monitoring and evaluating the current state of the economy and making projections for both the short and long-term. Eight times per year, they make an announcement about their benchmark interest rate, also known as the overnight lending rate or policy interest rate. Adjusting this rate helps to ensure inflation stays near the BoC’s target by changing the way Canadians spend and invest their money. The bank has set it’s target between 1 and 3 percent, with the optimal rate of inflation sitting at the midpoint of 2 percent.
Four times per year, they also release a comprehensive Monetary Policy Report (MPR) along with their rate announcement. The MPR covers the bank’s forecasts for economic factors like inflation, GDP growth and also outlines current risks to the Canadian economy.
What does it mean when they raise or lower their ’Benchmark Interest Rate?’
You can think of the Bank of Canada as your lender’s bank. Your lender borrows money and pays interest on it just like you do. When the central bank changes their interest rate, that is the rate that your lender is paying. When rates are higher at the central bank, it costs your lender more money to borrow from them, and they generally pass this on to consumers by increasing their interest rates. When the BoC decreases rates, your lender will likely follow suit as well.
It is important to note here that your lender is free to change their rates at any time independent of what the BoC does, however, changes to the overnight lending rate are an excellent indicator of what is to come.
How do changes to the benchmark interest rate affect me?
If you hold a variable rate mortgage, you will generally see a fairly immediate change to your mortgage payments as your lender will adjust their prime lending rate based on the changes to the overnight lending rate.
If you have a 5-year fixed rate (Canada’s most popular mortgage rate), your mortgage payments will stay the same until your renewal date regardless of what the Bank of Canada sets their rate at. However, the overnight lending rate can affect fixed-rate mortgage holders in a less direct way. If the BoC opts to increase their rate several times in a row, for example, this could lead to a rise in rates in the bond market and subsequently in fixed rate mortgages.
How can I protect myself from rising rates?
The number one thing you can do to protect yourself from future increases to interest rates is to ensure that you are not taking on too much debt. There have been many changes to the Canadian mortgage industry within recent years that have been aimed at protecting homebuyers from overextending themselves financially, however it is important for you to do your due diligence in ensuring that you budget within your means.
If you are someone who may not be able to afford a sudden increase in your mortgage payments, a variable rate may not be your best bet. Historically, variable rates do save homeowners money in the long-run - however, peace of mind in knowing that your mortgage payments will stay the same until your renewal date can be more important for some than saving money over time.
If you find yourself overwhelmed by your finances, we can help. People do not usually think of their Mortgage Broker as a source of information for financial advisement, however Brokers are specifically trained to be able to calculate your debt ratios and identify opportunities to save you money.
Questions? We are always happy to help. Feel free to reach out to us at any time at (780) 416-1085 or through our contact form.