The winds of global economic uncertainty may be swirling, but the Bank of Canada is taking a strong stance, choosing to keep its trend-setting Overnight Lending Rate firm at 1.75% in its September announcement. It is the seventh month in a row the rate has stayed at status quo, and makes the BoC somewhat of an outlier as central banks around the world opting to cut their variable costs of borrowing.
Global Trade Conflicts a Growing Concern
The majority of economic doubt is due to rising U.S.-China trade conflicts, which have chilled business investment around the world and has pulled growth down at a faster rate than the BoC forecasted back in July. While the U.S. economy – Canada’s largest trading partner – remains fairly stable, this weakening on a global scale is trickling down through the markets. Not only have commodity prices taken a tumble, but investors are choosing to pile into shorter-term government bonds rather than long-term.
This has pushed bond yields to historic lows, and has also led to a phenomenon known as an inverted yield curve; essentially, this means it is currently less expensive, and considered higher risk, to invest in longer-term bonds than short-term, when it is typically the other way around. This signals that investors aren’t optimistic about long-term economic prospects, and that a future recession could be possible.
Economic Performance Remains Strong Close to Home
As a result, central banks around the world have cut their variable costs of borrowing as a precaution – but there are a few reasons why the BoC has yet to do so. One is that, based on shorter-term data, the economic picture for Canada is currently quite cheery. There was a strong uptick in energy production in the second quarter as well as an improvement in the export sector, and inflation has been sticking close to its 2% target.
The housing market has also grown more than was expected with activity for condos and houses for sale, as well as new builds, picking up, largely fueled by today’s lower mortgage rates.
However, the BoC acknowledges that these positive gains may be temporary; domestic and international business investment is down sharply from last quarter, and it forecasts slower economic growth is in the cards for the second half of the year. It may be holding off on cutting rates now to keep some wiggle room on hand if the econom goes south in the near future.
With this kept in mind, the BoC says its current monetary policy – its choice to hold rates – is appropriate, though it will keep a very close eye on data and global economic trends as it develops its outlook. In fact, analysts largely expect a rate cut could occur as soon as October, though some think the BoC will hold out for the remainder of 2019.
What Does This Mean for Borrowers?
A silver lining to all this increased investor caution is that it has pushed bond yields – which are used by consumer banks to set the cost of their fixed mortgage rates – down to historic lows. This means borrowers looking to either sign up for a new mortgage rate, renew their existing one, or refinance their debt may have access to very competitive rate pricing, which wasn’t available in the market as recently as a few months ago. It’s important for borrowers to weigh their options when interest rates are low, and ensure they’re getting the best deal possible from their lender. However, those currently locked into a fixed mortgage term will not currently be affected by lower bond yields, as their rate does not change until their term expires, unless they choose to break their mortgage.
For variable-rate mortgage holders or applicants, there won’t be any immediate change for rate prices; existing borrowers won’t see any fluctuation in their mortgage payments, and lenders are under no obligation to discount their variable rates at the moment for new borrowers. However, those considering signing up for a variable rate will already benefit from some of the lowest mortgage pricing available in today’s low-interest environment, and may see discounting in the months to come.
The next Bank of Canada rate announcement will be October 30, 2019.