The Bank of Canada (BoC) ushered in another season of stability for interest rates as it held its trend-setting Overnight Lending Rate at 1.75%, where it has remained since October of last year, in its July announcement.
While the economy has been stabilizing and strengthening on the home front, global growth has been considerably slower as trade tensions between the U.S. and China have taken a bite out of global GDP. As a result, central banks around the world, including the U.S. Federal Reserve and European Central Bank, have been on a rate-cutting mandate. Thus far, Canada has bucked that trend by keeping its cost of borrowing at
It reports the Canadian economy is “returning to growth and potential” with a strong performance in Q2, rebounding from temporary slowdowns throughout the beginning of the year when poor weather delayed operations and oil prices tumbled. Today, the job market continues to be strong, which is supporting consumption, and exports continue to
Improving Housing Market Boosts Economy
The housing market, which is one of the largest contributors to the economy, is also stabilizing. Demand for condos and houses for sale is returning, as buyers have absorbed the affordability fallout from the federal mortgage stress test. Sustained lower mortgage rates have also helped boost real estate demand.
Stated the BoC, “At the national level, the housing market is stabilizing, although there are still significant adjustments underway in some regions. A material decline in longer term mortgage rates is supporting housing activity.”
The BoC forecasts that Canadian GDP will grow to 1.3% this year and 2% in 2020 and 2021. Inflation, which is one of the largest factors influencing rate hikes and cuts, remains close to its 2% target and is expected to stay steady into 2020.
The BoC’s Governing Council noted it will pay particular attention to developments in the energy sector and the impact of trade conflicts on the prospects for Canadian growth and inflation.
What Does This Mean for Borrowers?
Despite strong domestic economic performance, which typically would set the stage for a rate hike, the BoC has to keep rank with other central banks, and particularly the U.S. Fed, in order to prevent the Canadian Dollar from getting too strong.
As a result, it’s expected to hold its Overnight Lending Rate – which consumer banks use to set their own borrowing rates – steady all through the remainder of this year, and may even cut it in 2020 should growth start to slow.
This trajectory was widely forecast by a poll of 40 economists conducted by Reuters – they expect the BoC will resist a cut for as long as it can, despite the likelihood the U.S. Fed will do so, with 40% expected rates will go down next year. There is very little expectation rates will be hiked during that time frame.
This means variable borrowers, whose rates are set based on the BoC’s trends, can expect price stability throughout the remainder of this year, and may even enjoy a discount to their monthly payments next year, or see a greater portion of them go toward their principal debt.
That means it can be a great time to go variable for those who are less risk-averse and have the capacity within their finances to handle the uncertainty that comes along with a market-linked rate.
However, five-year bond yields – which consumer banks use to set the cost of borrowing for their mixed mortgage rates – also remain historically low, at well below the 2% mark. This has narrowed the difference between fixed rates – which are traditionally priced higher due to the stability they provide – and variable, meaning it could also be an advantageous time for borrowers to lock in at a discount, if they prefer.