Bank of Canada makes first rate cut since 2015

Posted by Kyle Green, The Green Mortgage Team

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 Our friends over at Green Mortgage Team sent us this Op-Ed on how the recent BoC rate drop will affect you and mortgage rates in general. ~Ed

Today, the Bank of Canada dropped the overnight lending rate by a whopping 0.5%.

This is the first rate cut the Bank of Canada has had since 2015, when falling oil prices caused the Bank of Canada to take precautionary measures. This move comes one day after the US, Canada’s largest trading partner, called for an “emergency” meeting and reduced their overnight lending rate by 0.5%.

Why did this happen?

There are a number of reasons, although it seems like many of these events have been fueled by the Coronavirus scare.

  1. Oil prices are $10/barrel less than expectations set only two months ago in January. Canada is very export-dependant and dropping oil prices will negatively affect Canada.
  2. With Canada being so export heavy, maintaining a low dollar is important. When the US fed decreases rates by 0.5%, it weakens the US dollar to the Canadian loonie. This makes it more expensive to import our goods, which could have a negative impact on exports. By following the US, we are weakening our dollar to stay on par and not letting our exports get more expensive relative to other countries around the world.
  3. Coronavirus is having an impact on manufacturing in China, which has lowered both their exports and imports. China is buying less raw materials to manufacture goods, and is also buying less high-end goods (sorry Gucci, but now is not a good time to be selling $2,000 handbags to China).
  4. Stock markets have been in a bit of a free-fall (this is why we invest in real estate, right!?), and it was interesting to see that some of the reasoning behind the US Feds’ decision was definitely stock market-driven. While I don’t agree with this (the role of the Fed is to use interest rates and other means to support macro-economic factors like economic growth, jobs, inflation, currency, among others), lowering interest rates should at least lessen the blow a bit.

Canada is one of many countries who have already dropped rates this year, and we are only two months in.

How does this affect you?

It’s important to note that a drop in the overnight lending rate does not automatically mean that the banks will follow suit and drop by the same amount. Banks set their Prime rates on their own (TD Prime for instance is 4.15% and others are 3.95%), and there has been precedent for the banks to not follow suit with a full drop. Here is the takeaway from this information:

  1. The banks probably will not drop a full 0.5%. Expect something closer to 0.25% of a drop.
  2. Remember that this drop will only affect those who are in variable rate mortgages. Fixed rate contracts are unaffected.
  3. Fixed rates are 98% correlated with bond yields, which have also been falling. Just in the past two weeks approximately, bonds have fallen 0.5%. A lot of the past drops were built into the current rates being offered, but there is currently downward pressure on fixed rates; therefore, expect some drops in the next week or so.