Key interest rate likely to remain low for a while

The Bank of Canada (BoC) made its interest rate announcement on Oct. 21, and its key interest rate – the overnight lending rate – will remain the same for now. The BoC has been in the news in the last few weeks, reiterating its focus is on inflation, and until the inflation rate moves too far from its two-per-cent target, there won’t be a chance in interest rates. The overnight rate has been at 0.50 per cent since July.

July was the second rate cut in 2015, and the results have led to worry that the low interest rate environment is hurting Canadians more than it’s helping. Specifically, house prices have run up in Vancouver and Toronto, and household debt is at an all-time high.

BoC Governor Stephen Poloz hasn’t been afraid to share his opinion on those matters. “It is not the role of monetary policy to protect individuals from making bad choices,” he said in a speech in Washington last month. In other words, it’s the bank’s job to keep inflation to target, and if people use the low rate incentive to borrow money they shouldn’t, that’s not something that can be helped.

If you’re one of the people who has borrowed money you shouldn’t have, you got another break with this latest announcement. The BoC rate is now locked at 0.50 per cent until at least December, and indications are that it could be there for a long time. In the media release, the bank said “Global economic growth has been a little weaker than expected this year,” but, “the Canadian economy can be expected to return to full capacity, and inflation sustainably to target, around mid-2017.”

That means it’s business as usual if you have a variable rate mortgage. The number to keep an eye on in the coming months is fixed mortgage rates. The spread between fixed and variable rates has been closing recently, making fixed rates a more appealing choice. Currently, the premium for a five-year fixed mortgage over a five-year variable mortgage is only about a half a percentage point. If fixed rates continue their slide lower, and variable rates hold steady, we could get to a point where fixed rates become the better option – even though variable rates have been the less expensive choice throughout most of history.

The next Bank of Canada rate announcement is Dec. 2.

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