Bank of Canada cuts overnight lending rates

Until recently, experts were predicting an interest rate hike in 2015, but to everyone’s surprise The Bank of Canada announced it was cutting its overnight lending rate from 1 per cent to 0.75 per cent this morning in response to falling oil prices. The cost per barrel of oil is now less than half of the $105 US it cost in June of last year.

According to CBC:

“The drop in oil prices is unambiguously negative for the Canadian economy,” Bank of Canada governor Stephen Poloz said in a morning news conference. “Canada’s income from oil exports will be reduced, and investment and employment in the energy sector are already being cut.”

In other words, the rate is intended to help protect Canadians against future risks like deflation and potential job losses in sectors most heavily impacted by oil prices (and particularly in Alberta, where the housing market is already feeling the chill from oil prices).

The last time BoC cut central interest rates was September 2010, so this marks the central bank’s first rate reduction in four and a half years and signals its concern over oil prices. Following the rate cut, the Canadian dollar fell to its lowest point since April 2009. However, while the BoC forecast GDP growth of 1.5 per cent in the first half of 2015, it expects growth to pick up in the second half of the year, averaging out to 2.1 per cent economic growth for the year (down from its previous forecast of 2.4 per cent). These forecasts are based on an expected average oil price of $60 US per barrel over the next two years (up from the current price of $50 US).

What This Means for Mortgage Rates

None of the lenders I work with have lowered Prime rate just yet. Prime rate may go down if and when the banks follow, which would mean borrowers with a variable interest rate would see their monthly payments go down as well. For instance, if you’d recently taken out a mortgage with a 5-year variable rate of 2.25 per cent, and you’d borrowed $400,000 amortized over 25 years, your monthly payment would be $1,744.53. But if Prime dropped by .25 per cent and your variable rate went down to 2 per cent, your monthly payment would drop to $1,695.42 (or depending on the lender, more money would go to principal rather than interest and your payments would stay the same).

Alternately, Prime may stay at its current rate and lenders could decrease fixed rates for terms of less than 5 years (so they’re not locked into ultra low rates for long).

That said, the overnight lending rate that BoC adjusted does not determine fixed interest rates. Downward pressure on the dollar and bond yields would impact fixed rates. I spoke with two lenders so far this morning and they don’t think the change in fixed rates will be dramatic.

BoC’s next interest rate announcement is March 4, 2015.

 

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