The Bank of Canada announced today, July 10, 2019, that they are keeping their overnight rate at 1.75%. This is the sixth announcement where the Bank has decided to keep rates the same. The rate was last increased on October 24, 2018, to its current rate.
This is the longest period of time without an increase since rates started moving upwards in July 2017. While many believed that rates would continue to increase into 2019 and beyond (in small steps of 0.25 percentage points per increase), the reality is much different.
The economy didn’t perform as well as the Bank was hoping when rates were rising. Combined with a large and ever-growing amount of personal debt (most of which is in mortgages) and there’s a recipe for keeping rates low.
Low rates are intended to stimulate the economy by allowing businesses and banks to borrow money at low rates. It also entices them to invest that money into the economy, where it can get greater returns. Higher rates encourage saving, since borrowing becomes more expensive.
Part of the blame was assigned to trade conflicts between the US and China, both of which are major Canadian trade partners. In fact, most of the Bank’s worries seem to be based on external factors, not internal ones: they wrote in their statement that “Escalation of trade conflicts remains the biggest downside risk to the global and Canadian outlooks.”
Another part of the blame was given to “temporary factors,” but the Bank didn’t go into detail about what those temporary factors are. They mentioned the “dynamics of gasoline prices” and “significant [housing price] adjustments underway in some regions” as potential causes, but in my opinion those are semi-permanent features of the Canadian economy, especially recently.
Inflation is briefly mentioned in the release, with the Bank saying that it’s remaining “around the 2 percent target.” 2 percent is often the “sweet spot” for inflation, as it encourages people and businesses to invest in the economy without rapidly depreciating all their assets.
The Bank tracks inflation using CPI, or Consumer Price Index. The Bank expects CPI to actually go down temporarily towards the end of this year, followed by a return “to 2 percent by mid-2020.”
The overnight rate is one of the tools that the Bank of Canada uses to regulate inflation.
Whether you have a fixed or variable rate, the answer is: nothing. Fixed rates always stay the same for the length of your term, and variable only goes up or down when the Bank raises or lowers interest. Since there was no change, you shouldn’t see any changes in your mortgage payment, either.
If you’re in the market for a mortgage, then now is a great time to get one. The next rate announcement isn’t until September, so no changes will be happening until then. As always, we recommend shopping for mortgage rates so you can find the best one.