The Bank of Canada Keeps Interest Rates at 0.75%

The Bank of Canada (BoC) is taking a “steady as she goes” approach to interest rates. Canada’s central bank announced on Wednesday it’s keeping the overnight lending rate at 0.75 percent. The move came as a surprise to some economists, who were predicting a further rate cut.

Markets are still reeling from January when the BoC cut interest rates for the first time in nearly five years. Prior to that, interest rates were frozen at 1 percent. Although most economists predicted the BoC would start increasing interest rates in mid-2015, falling oil prices tied our central bank’s hands.

 What is the Overnight Lending Rate?

The overnight rate is the interest rate that the big banks charge to each other for borrowing one-day funds. A change in the overnight lending rate would be felt throughout the Canadian economy. The big banks set prime rate based on the overnight lending rate, plus a spread. Although the banks typically change prime rate based on the overnight lending rate, as we learned in January, there’s no guarantee the banks will pass on the full rate cut to borrowers.

 January’s Rate Cut “One and Done’

If you’re hoping for another rate cut, you shouldn’t get your hopes up. The BoC looks to be one and done. Faced with lower oil prices, the 25 basis point cut in January has given the BoC the breathing room it needs. As our economy gets used to the new reality of lower oil prices, January’s rate cut looks to act as a buffer against any negative side effects.

 "Financial conditions in Canada have eased materially since January, in response to the Bank’s recent monetary policy action and to global financial developments," said the BoC in a statement. "In light of these developments … we judge that the current degree of monetary policy stimulus is still appropriate."

 With oil prices stabilizing at $50 per barrel, the BoC is taking a “wait and see approach” before deciding to change interest rates.

 

Record Low Mortgage Rates

Today’s bank of Canada announcement is a mixed bag for homeowners with mortgages. Although we didn’t see another rate cut, we’re still enjoying borrowing costs at record low levels. If you chose a variable rate mortgage, you’re still benefiting from January’s rate cut. Although most banks only cut prime rate by 15 basis points, that’s still less of your money going towards interest and more towards principal.

 

There’s never been a better time to lock-in for those house-hunting this spring or those whose mortgage is coming up for renewal. If you’re a first-time homebuyer looking for certainty, you should consider a fixed rate mortgage. You can sign up for a 5-year fixed rate mortgage for under three percent today. Although fixed rate mortgages are slightly higher than variable rate, for many it’s worth paying a bit more for certainty. Who knows where prime rate will be in five years’ time.