October 30, 2019
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
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
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
However, the BoC will keep an eye on whether today’s
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.