December 7, 2016
Bank of Canada Rate Remains Unchanged in December
The Bank of Canada has revealed its final interest rate announcement for 2016, opting to leave the cost of borrowing unchanged for the rest of the year. The Overnight Lending Rate remains at 0.5% (where it has been since July 2015), with the Bank Rate and Deposit Rate at ¾ and ¼, respectively.
That the BoC is sitting at status quo isn’t a surprise to analysts – Governor Stephen Poloz has made it clear the bank will take a “wait and see” approach as markets react dramatically to the outcome of the American election. “Uncertainty, which has been undermining business confidence and dampening investment in Canada’s major trading partners, remains undiminished,” states the BoC. “Following the election in the United States, there has been a rapid back-up in global bond yields, partly reflection market anticipation of fiscal expansion in a U.S. economy that is near full capacity.”
Waiting Out the “Trumpflation” Effect
What is out of the ordinary is the BoC is taking a different route than its American counterpart the Federal Reserve, which is certain to hike interest rates on December 14 in preparation for rising inflation as a result of president-elect Donald Trump’s anticipated spending plans. It’s the first time since 2007 the central banks have split on monetary policy, and highlights how different the economic situations are in each country.
When it comes to Trump, and whether his policies could cause an economic shock to Canada, Poloz has said that it’s simply too soon to tell. “We only incorporate actual policy changes – and there haven’t been any of those,” he said in an interview with Bloomberg’s Amanda Lang. “We just have to wait and see like anyone else.”
The biggest risk to Canada – and potentially rising mortgage rates – continues to be trade, he affirmed, adding that the bank is keeping its tools and options open should change in the U.S. impact Canada in the future.
“Canada is very reliant on trade and anything that disturbs that is a question mark,” he stated to Lang. “It isn’t uniformly a negative question, but it means we have to have all our ducks lined up and ready to negotiate those things and be open to other trade agreements if we’re going to grow our new markets.”
New Mortgage Rules Will Be Positive for Economy
The Boc has pointed to high levels of risky household and mortgage debt as a top vulnerability for the economy in past reports, and feels recently introduced mortgage rules – which make mortgage qualification more stringent for home buyers – will help reduce this risk. “While household imbalances continue to rise, these will be mitigated over time by announced changes to housing finance rules,” states the bank’s announcement.
Speaking to Lang, Poloz said they’re already seeing some very early effects of the changes. “This will take some time, but it will mean we’re seeing stronger underwriting for future mortgages and that automatically means the stock of debt is improving its resilience though time,” he said. “That’s the most important thing for us – it’s not about whether housing prices go up… but the matter of the resiliency of the system will be improved by this, and that takes a stressor out of the equation as you’re trying to guide the economy along here.”
What This Means for Your Mortgage
As the banks generally take their cues for Prime rate pricing from the BoC’s Overnight Lending Rate, no movement means variable mortgage holders likely won’t see any change to their rates in the short term. Payments, and the timeline to pay off your mortgage, will – in theory – remain the same. However, as we saw last month when TD hiked its Prime rate 15 basis points above the other banks, lenders may take their own cues from Trump-induced economic uncertainty. Be sure to check back for more updates that could impact your mortgage rate!