Bank of Canada lowers overnight rate to ¼ percent

With the Bank of Canada dropping its overnight rate again in response to the COVID-19 pandemic, it would seem to be a great time to shop for a new mortgage or mortgage refinancing. This is not the case however as advertised interest rates for new mortgage applications climbed significantly last week.

  • Rate Announcement: 50 basis point emergency cut by Bank of Canada
  • Overnight rate: Now 0.25%
  • Prime Rate: Currently 2.95%; pending change to potentially 2.45%

The Bank of Canada today lowered its target for the overnight rate by 50 basis points to ¼ percent. The Bank Rate is correspondingly ½ percent and the deposit rate is ¼ percent. This unscheduled rate decision brings the policy rate to its effective lower bound and is intended to provide support to the Canadian financial system and the economy during the COVID-19 pandemic.

The spread of COVID-19 is having serious consequences for Canadians and for the economy, as is the abrupt decline in world oil prices. The pandemic-driven contraction has prompted decisive fiscal policy action in Canada to support individuals and businesses and to minimize any permanent damage to the structure of the economy.

The Bank is playing an important complementary role in this effort. Its interest rate-setting cushions the impact of the shocks by easing the cost of borrowing. Its efforts to maintain the functioning of the financial system are helping keep credit available to people and companies. The intent of our decision today is to support the financial system in its central role of providing credit in the economy and to lay the foundation for the economy’s return to normalcy.

The Bank’s efforts have been primarily focused on ensuring the availability of credit by providing liquidity to help markets continue to function.  To promote credit availability, the Bank has expanded its various term repo facilities. To preserve market function, the Bank is conducting the Government of Canada bond buybacks and switches, purchases of Canada Mortgage Bonds and banker’s acceptances, and purchases of provincial money market instruments. All these additional measures have been detailed on the Bank’s website and will be extended or augmented as needed.

Today, the Bank is launching two new programs.

First, the Commercial Paper Purchase Program (CPPP) will help to alleviate strains in short-term funding markets and thereby preserve a key source of funding for businesses. Details of the program will be available on the Bank’s web site.

Second, to address strains in the Government of Canada debt market and to enhance the effectiveness of all other actions taken so far, the Bank will begin acquiring the Government of Canada securities in the secondary market. Purchases will begin with a minimum of $5 billion per week, across the yield curve. The program will be adjusted as conditions warrant but will continue until the economic recovery is well underway. The Bank’s balance sheet will expand as a result of these purchases.

The Bank is closely monitoring economic and financial conditions, in coordination with other G7 central banks and fiscal authorities, and will update its outlook in mid-April. As the situation evolves, the Governing Council stands ready to take further action as required to support the Canadian economy and financial system and to keep inflation on target.

The next scheduled date for announcing the overnight rate target is April 15, 2020. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR at the same time.

Source: Bank of Canada



Bank of Canada Holds Interest Rate

mortgage interest rates

mortgage interest rates

Today the Bank of Canada kept the overnight lending rate at 0.5% after cutting it twice last year. This rate is what the banks charge each other for short-term loans and generally affects retail mortgage rates. Many economists had predicted a rate drop of 0.25% although that would have further weakened the Canadian dollar.

The Bank of Canada’s official news release is below.

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.

Inflation in Canada is evolving broadly as expected. Total CPI inflation remains near the bottom of the Bank’s target range as the disinflationary effects of economic slack and low consumer energy prices are only partially offset by the inflationary impact of the lower Canadian dollar on the prices of imported goods. As all of these factors dissipate, the Bank expects inflation will rise to about 2 per cent by early 2017. Measures of core inflation should remain close to 2 per cent.

The dynamics of the global economy are broadly as anticipated in the Bank’s October Monetary Policy Report (MPR), with diverging economic prospects and shifting terms of trade. China continues its transition to a more sustainable growth path and the expansion in the United States is on track, despite temporary weakness in the fourth quarter of 2015. The U.S. Federal Reserve has begun to gradually withdraw its exceptional monetary stimulus. While risks to the world outlook remain and have been reflected in sharp price movements in a range of asset classes, global growth is expected to trend upwards beginning in 2016.

Prices for oil and other commodities have declined further and this represents a setback for the Canadian economy. GDP growth likely stalled in the fourth quarter of 2015, pulled down by temporary softness in the U.S. economy, weaker business investment and several other temporary factors. The Bank now expects the economy’s return to above-potential growth to be delayed until the second quarter of 2016. The protracted process of reorientation towards non-resource activity is underway, helped by stronger U.S. demand, the lower Canadian dollar, and accommodative monetary and financial conditions.  National employment remains resilient despite job losses in the resource sector and household spending continues to expand.

The Bank projects Canada’s economy will grow by about 1 1/2 per cent in 2016 and 2 1/2 per cent in 2017. The complex nature of the ongoing structural adjustment makes the outlook for demand and potential output highly uncertain. The Bank’s current base case projection shows the output gap closing later than was anticipated in October, around the end of 2017. However, the Bank has not yet incorporated the positive impact of fiscal measures expected in the next federal budget.

All things considered, therefore, the risks to the profile for inflation are roughly balanced. Meanwhile, financial vulnerabilities continue to edge higher, as expected. The Bank’s Governing Council judges that the current stance of monetary policy is appropriate, and the target for the overnight rate remains at 1/2 per cent.

Information note:

The next scheduled date for announcing the overnight rate target is 9 March 2016. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on 13 April 2016.

Banks All Cut Prime Rates

mortgage rate cuts

mortgage rate cuts

After yesterday’s move by the Bank of Canada to cut the overnight lending interest rate to 0.5 per cent various key mortgage providers have also lowered their rates. As anticipated they have not discounted their mortgage rates by the full 0.25% again, but some have discounted them more than last time.
The Toronto Dominion Bank was first to respond, just 12 minutes after the Bank of Canada’s announcement. It would appear they were ready for the rate drop and discounted their prime rate by 0.10%, like last time, to 2.75%. Other financial institutions, who clearly watched TD’s move, elected for a cut of 15 basis points (0.15 per cent). TD cut their prime rate again to match the other banks.
Scotiabank, RBC, CIBC, and BMO have all announced the rate cut to 2.70 per cent effective today. TD’s second rate cut will be behind the others for one day as the initial decrease takes effect today. The second cut comes in tomorrow (Friday 17th).

It is surprising that the banks have cut their rates by .015% this time, when they only cut them by .010% the last time the BoC made a .025% reduction. The banks have always claimed that mortgage rates depended more on the bond market, than the BoC’s overnight lending rate. Perhaps last time they decided to profit from the cut in rates.

Interest Rates Drop Again

mortgage interest rates

mortgage interest rates

The Bank of Canada’s Governor, Stephen Poloz, publicly accepted the fact that he has been overly optimistic regarding the condition of the Canadian economy. He has now tried to help the economy once again by reducing the central bank’s over night interest rate from 0.75 to 0.50 per cent.

The Canadian dollar has reacted by dropping to 77.43 cents U.S., a level not seen since March 2009. This is when Canada was in the middle of a recession. The economy is now recognized as having contracted slightly in the first half of the this year by the bank, mentioned in a statement accompanying the latest announcement.

The Bank of Canada overnight lending rate is the central bank’s main tool for influencing Canadian interest rates. This important decision comes in the wake of lower oil prices. A number of major banks have concluded the Canadian economy has been in a recession for the first half of this year. The negative growth in Canada’s economy the first half of 2015 fits the typical meaning of a recession. The bank governor consistently refused to make any reference to a recession, claiming that any discussion as to whether we are in a recession or not is unhelpful.

Stephen Poloz, who shocked the financial community in January by delivering in an unanticipated rate decline, had been expecting the overall economy to rebound rapidly from the oil price shock that hurt our economy earlier this year. Now he is saying that he had been overly optimistic, and the bank’s estimation of economic growth in 2015 has been reduced considerably from April. This new position demonstrates even further cutbacks in financial investment in the energy market, combined with weakened exports of non-energy goods.

“Canada’s overall economy is expected to expand by about 1%,” Poloz said, and our economy is not expected to be back to normal until the first half of 2017. The Bank of Canada’s governor also cited international circumstances for Canada’s economic issues, referring mainly to conditions in the United States and China. Poloz stated he anticipates the U.S. economic climate to recover again in the second half of this year, but does not see any immediate change in China.

As with the last quarter point drop was saw, a few months ago,, mortgage interest rates are not going to drop buy the same amount. Mortgage rates are actually dictated more by the bond market than the Bank of Canada’s overnight lending rate, and will likely only drop 0.10%. Some consumer who have a variable rate mortgage will see some savings for now.

Mortgage Interest Rates Hikes Looming

mortgage rates set to increase

mortgage rates set to increase

Residential home purchases are on the rise in the US and are set to be the best in eight years – since 2007. Buyers are surging back into the housing market, and the vast majority are first time purchasers. This influx of home buyers is driving prices up and up, due to strong employment and very low mortgage interest rates.

The busy housing market is a sign that the U.S. economy is firmly on the road to recovery and definite improvement. Buyers are more positive about their own financial futures and appear ready to close sales quickly. Many fear being possibly priced out of the market by potential mortgage rate hikes and steadily increasing home prices.

According to Nela Richardson (Chief Economist at Redfin), “demand is off the charts in 2015, and that is really boosting sales. Last year, buyers were dipping their toes in their water. Now, they’re diving in.”

The National Association of Realtors stated on Monday that sales of existing homes climbed 5.1% last month to a seasonally adjusted annual rate of 5.35 million. May was the third straight month of the sales increasing, and has surpassed 5 million homes.

Listings have not been able to keep up with the increase in demand, leading to the higher than normal price increases. Average home selling prices have risen 7.9 per cent in the last 12 months to $228,700, (US) coming in just below the July 2006 peak before the crash.

Roughly 32% of the homes purchased last month were by first timer buyers. This is up from 27% just one year ago. The increase is significant but is still behind the traditional average of first time buyers making uo 40% of the residential buyers. The larger percentage of non-first-time buyers could be due to the large amount of displaced homeowners re-entering the market after being forced to rent.

The increase in home sales can easily be linked to employment numbers. 3.1 million additional workers have been hired in the past year, and the unemployment rate has dropped to 5.5% from 6.3%. This has led more Americans to start feeling financially comfortable immediately following the most severe housing related downturn in eighty years.

According to Richardson,“that’s the big psychological shift between this year and last year.”

Mortgage rates are reasonably modest, however, may be set to rise as the Federal Reserve considers an interest rate increase – the first time in nearly a ten years. Thirty year fixed rates were up to 4% last week, according to mortgage provider Freddie Mac – that is an increase from a year long low of 3.59%.

“This has plenty of buyers appearing willing to complete their purchase before rates and prices increase any further,” according to Jonathan Smoke, chief economist at A recent Coldwell Banker survey discovered that 28% of homes are selling within as little as two weeks, in comparison to 19% before the recession. Numerous economists warn that the sales increases in recent months may be only temporary if prices increasees continue and price buyers out of the market.

Whatever happens south of the border will most likely have an effect on Canadian interest rates also. The extremely low mortgage interest rates we are enjoying in Canada currently are about as low as they can go. Combined with a declining Canadian dollar, a move by the Federal Reserve may be all it takes to bump our rates also. Nobody is disputing the fact that interest rates are going up – it is just a matter of when.

Low Mortgage Rates Continue as CMHC Predicts Moderation in Housing Market Activity for Canada in 2015 and 2016

Mortgages insured by CMHC

Mortgages insured by CMHC

Canada’s federal housing division, CMHC, has revised their predictions for new residential housing starts for 2015. CMHC anticipates that the rate of new home development to steadily decelerate in the foreseeable future.

Even though the Canada Mortgage and Housing Corp said on February 6th., it anticipates employment and disposable income to continue to support the country’s robust housing market, it noted the downside risks have increased since its October forecast due to the fact of the decline in oil prices. They stated that low oil prices will detrimentally impact certain economic regions like Alberta, Saskatchewan, and Newfoundland and Labrador. This will only be partially balanced out by the favorable impact of reduced exchange and mortgage interest rates.

Housing starts are expected to range between 154,000 and 201,000 units this year, with a point forecast, or most likely outcome, of 187,400 units, the CMHC stated. This is somewhat reduced from the projection it offered in October, stating a range of 172,800 to 204,000 units, and a point forecast of 189,500. According to its base case scenario, new housing starts will drop by 1% in comparison to 2014. In 2016, the CMHC anticipates a range of 148,000 units to 203,000 units, with a point forecast of 185,100, which is not much of a change.

Canada averted most of the global economic turmoil and has experienced and accelerated housing market helped by continuing lower interest rates on mortgages. Many economists are still expect the Canadian housing market to see a softer landing, even though the sudden slide in the price of crude oil has brought up some anxiety about Canada’s financial future moving forward, since oil is a leading export.

Lastly the CMHC is forecasting average home prices to improve by 1.5 percent in comparison to last year.

See full press Release below or read it on CMHC’s site by clicking HERE:

OTTAWA, ONTARIO–(Marketwired – Feb. 6, 2015) – According to CMHC’s first quarter 2015 Housing Market Outlook, Canada Edition, housing starts in 2015 will remain similar to levels observed in 2014 and broadly in line with economic and demographic trends. By 2016, slight moderation is expected.

“Our market outlook calls for gradual moderation in the pace of new home construction over the next couple of years as employment, disposable income and high net migration continue to support the market,” said Bob Dugan, Chief Economist for CMHC.

“However, downside risks have increased since the previous forecast due mainly to recent declines in oil prices. Lower oil prices will negatively affect oil-producing economies like Alberta, Saskatchewan, and Newfoundland and Labrador, which will only be partly offset by the positive effects of lower exchange rates and interest rates across all provinces. We have widened the forecast ranges for housing starts, MLS® sales and average MLS® prices to reflect these risks.”

Under CMHC’s base case scenario, housing starts are expected to decline by 1.0 per cent in 2015 relative to 2014; Multiple Listing Service®(MLS®2) sales are expected to remain unchanged, and the MLS® average price is expected to increase modestly by 1.5 per cent.

On an annual basis, housing starts are expected to range between 154,000 and 201,000 units in 2015, with a point forecast of 187,400 units. For 2016, housing starts are forecast to range from 148,000 units to 203,000 units, with a point forecast of 185,100 units.

MLS® sales are expected to range between 425,000 and 504,000 units in 2015, with a point forecast of 479,900 units. In 2016, resales are forecast to range from 410,000 units to 505,000 units, with a point forecast of 474,400 units.

The average MLS® price is forecast to be between $384,000 and $428,000 in 2015, with a point forecast of $414,200. For 2016, the average MLS® price is forecast to be between $388,000 and $438,000, with a point forecast of $420,900.

As Canada’s authority on housing, CMHC contributes to the stability of the housing market and financial system, provides support for Canadians in housing need, and offers objective housing research and information to Canadian governments, consumers and the housing industry.

Follow CMHC on Twitter @CMHC_ca.

1 The forecasts included in the Housing Market Outlook reflect information available as at January 21, 2015. Where applicable, forecast ranges are also presented in order to reflect financial and economic risks to the outlook.

2The Multiple Listing Service® (MLS®) is a registered trademark owned by the Canadian Real Estate Association.


Bank of Canada Lowers Overnight Prime

mortgage interest rates

Interest rates drop

The Bank of Canada’s surprise decision to lower the overnight lending rate by 25 basis points, is furthering household concerns that the economy is in for possible downturn.

The share of Canadians who predict the national economy will weaken over the next six months rose to 41.5% last week, the highest since the 2009 recession and up from 36.1% a week earlier, according to Nanos Research. It was the first full week of polling since the central bank made its surprise cut on Jan. 21.

There is a mixed opinion as the whether the rate drop actually did any good at all in bolstering the Canadian economy. On the one hand it has validated the fears of some who think this years housing market will take a downturn. Canadians have typically been much more cautious than our neighbors to the south when it comes to borrowing. Just because interest rates are lower doesn’t mean people will take advantage of them.

While lower interest rates are seen as good for the economy, the actual 25 basis point (0.25%) decrease has not been passed onto the consumer. Most lending institutions were slow to react and even when they did, their rates have only dropped 10 – 15 basis points.

Only time will tell if Canadians get lured into a false sense of security by low interest rates and cheap gas – both of which could rise dramatically at any time.