Bank of Canada Bucks Global Trend with October Rate Hold

The Bank of Canada has opted to hold its trendsetting interest rate at 1.75% in its October announcement. It is the eighth month in a row the central bank has chosen to leave its rate untouched, making it increasingly an outlier among developed nations; as global economic uncertainties have escalated, many other central banks have slashed their national cost of borrowing, including the U.S. Federal Reserve, which is expected to cut its rate once again later today.

These ongoing trade conflicts – mainly due to tensions between the U.S. and China – have indeed put a damper on the Canadian economy, especially its export sector and commodity prices. However, while it acknowledges “a growing number of countries have responded with monetary and other policy measures to support their economies,” the BoC is resisting the urge to cut rates, despite the strength holding out will lend to the loonie.

Leaving Room for Future Cuts

Much of the motivation behind the Bank’s inaction is to hedge its bets against an economic downswing in the near future. Talks of an impending recession grow louder, and it is anticipated that Canada’s economy will slow throughout the end of 2019 due to pain in the energy sector, and a fading of other factors that have temporarily boosted GDP. By keeping its rate untouched, the BoC has built in some padding should it need to counter these factors later on. 

BoC Remains Optimistic About Canadian Economy

However, it remains optimistic that any slump should be temporary; business investment and exports are expected to rebound in 2020 and 2021 after contracting late this year, while government spending and a low cost of borrowing will keep consumer spending humming along. Employment and wage growth continue to strengthen and the housing market, which is a major economic contributor, continues to rebound across the nation, with an influx of new MLS listings and sales in most urban centres. 

However, the BoC will keep an eye on whether today’s low-interest rate environment pose a risk to stable borrowing practices, as well as the fallout from the federal mortgage stress test, which was put in place at the beginning of last year to cool too-hot markets.

In all, the BoC projects GDP to grow 1.5% in 2019, and by 1.7% and 1.8% in 2020 and 2021, respectively. Inflation remains close to its 2% target, though will dip temporarily next year as softening energy prices trickle through the economy. With this in mind, the BoC believes holding its rate remains the appropriate course of action for the time being, but will observe how global conflicts impact our nation’s bottom line.

“Governing council is mindful that the resilience of Canada’s economy will be increasingly tested as trade conflicts and uncertainty persist,” it states. “In considering the appropriate path for monetary policy, the Bank will be monitoring the extent to which the global slowdown spreads beyond manufacturing and investment. In this context, it will pay close attention to the sources of resilience in the Canadian economy – notably consumer spending and housing activity – as well as to fiscal policy developments.”

What Does This Mean for My Mortgage Rate?

The Bank of Canada trend-setting interest rate – also known as its Overnight Lending Rate – is used by the nation’s consumer banks to set their own variable cost of borrowing. This means, when the BoC cuts or hikes its rate, the banks will do the same regarding their variable mortgage and line of credit rates. As there was no change announced in today’s rate announcement, those holding variable mortgages will see no change in the near term to their monthly payments. As well, the pricing environment will remain stable for borrowers looking to apply for brand new variable mortgages, as well as those looking to renew or refinance their existing home financing.

While the Bank of Canada’s rate has no direct impact on fixed mortgage rates, its decision does influence them via its impact on the bond market; keeping the rate stable, and the loonie strong, signals that the Canadian economy is in good shape, which in turn makes government of Canada bonds fairly low risk investments. This keeps the price of bonds, as well as their pay-out yield, lower, which is a metric used by the banks in setting their fixed cost of borrowing. As a result, those looking to apply for a new fixed-rate mortgage, renew, or refinance, will likely enjoy well-discounted rates to choose from.

The next Bank of Canada announcement is set for December 4, 2019.

About Penelope Graham

Penelope Graham is the Managing Editor at Zoocasa, and has over a decade of experience covering real estate, mortgage, and personal finance topics. Her commentary on the housing market is frequently featured on both national and local media outlets including BNN Bloomberg, CBC, The Toronto Star, National Post, and The Huffington Post. When not keeping an eye on Toronto's hot housing market, she can be found brunching in one of the city's many vibrant neighbourhoods, travelling abroad, or in the dance studio.