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Bank of Canada to Maintain Current Overnight Rate of 0.25% Until Inflation Objective is Achieved

Today, the Bank of Canada announced that the overnight rate will continue to remain at the effective lower bound of 0.25%.

The bank also stated that the following programs, announced earlier this year to cushion the impact of COVID-19 on the economy, will remain in place:

  • Quantitative easing (QE) program, with large-scale asset purchases of at least $5 billion per week of Government of Canada bonds.
  • Short-term liquidity programs.
  • Provincial and corporate bond purchase programs.

Even prior to this announcement, Canadian economists and leaders in the financial community were in agreement that, due to economic uncertainty, the interest rates were going to remain low.

In fact, according to the Quarterly Economic Forecast by TD Bank, the lasting impacts of the pandemic will keep the Bank’s policy interest rate at its current level into 2022, at a minimum.

Economic recovery and inflation

The Bank also presented a scenario to show how and when can economic recovery be expected. While the scenario depicts a 7.8% percent decline in Canada’s real GDP in 2020, it also suggests that the growth will resume in 2021 with a 5.1% GDP increase.

To reduce the economic slack, The Bank intends to hold the policy interest rate at the effective lower bound until inflation gradually strengthens toward the targeted 2%.

Since 1995, BOC has maintained a 2% inflation target, as this rate historically delivered good overall economic performance and stability.

Reopening and the impact on borrowing

As COVID-19 cases decline, restrictions are being eased and reopening plans are being implemented in most regions.

Most economists concur that the rebound will start in the second half of the year and foresee a V-shaped outcome because of the recent announcements of coordinated monetary and fiscal stimulus. A report from Deloitte suggests that a rebound could happen as early as mid Q3 2020.

There also have been significant developments in the real estate industry.

For instance, to protect future home buyers and reduce risk, CMHC announced new lending rules that reduce the Gross/Total Debt Servicing (GDS/TDS) ratios, raise minimum credit score requirements, and exclude non-traditional sources of down payment.

Even with these changes in place, the lower interest rates can still encourage home buyers to apply for mortgages as well as homeowners to look into refinancing options.

The current overnight interest rate is still significantly lower than the 1.75% rate that was in place up until a few months ago.

In fact, in 2019, the high interest rate and stricter mortgage rules were beginning to affect housing values. The

In fact, in 2019, the high interest rate and stricter mortgage rules were beginning to affect housing values. The Teranet–National Bank National Composite House Price IndexTM report, published in August 2019, showed that the indexes for several markets had weakened and the month of July witnessed a +0.4% increase which was the smallest since November 2009.

Resources to help keep you up to date

In times where the economic conditions are uncertain, staying updated can help mitigate risk and prepare for the changing market sentiments.

These resources can assist mortgage brokers, lenders, and individuals gain in-depth insights into the housing market trends and plan ahead:

  • Teranet–National Bank House Price Index™ is an independent representation of the rate of change of Canadian single-family home prices. At a national level, you are able to monitor price changes and trends by neighbourhood or region, by different price tiers or housing types.
  • The Teranet Market Insights Report provides access to updated Canadian housing market data and the latest market trends.
  • Integrated tools that enable assessment of individual properties, neighbourhoods, and regions in real-time.

Read the full July 15 Bank of Canada rate announcement: https://www.bankofcanada.ca/2020/07/fad-press-release-2020-07-15/

What are your thoughts on the Bank of Canada rate announcement? Share with us on social media. Purview is on FacebookTwitter, and LinkedIn.

The next BOC release is scheduled for September 09, 2020.

Purview’s property solutions can help navigate a changing Canadian interest rate and economic conditions. Discover the power of more by calling 1-855-787-8439 or visiting www.purview.ca.

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