Bank of Canada Interest Rate Cut: 5 Ways Consumers May Be Affected
The Bank of Canada surprised financial markets bycutting its key interest rateby 0.25 per cent on Wednesday.
Here are five ways the central banks move will affectCanadian consumers:
1. Cheaper mortgages for some, but not all
This is good news if youre a variable-rate mortgage holder, said Penelope Graham, editor at RateSupermarket.ca.
Variable-rate mortgages are determinedby the prime interest rate, which is in turn linked tothe overnight interest rate the Bank of Canada just lowered.
It remains to be seen just how much [the banks] are going to cut the prime rate, but it will be cut, said Graham.
As of Thursday morning, none of the big banks had trimmed their prime rates.
TD Bank said Thursdayithad decided not to cut its prime rate, a decision that was carefully considered and is based on a number of factors, with the Bank of Canadas overnight rate only being one of them.Royal Bank of Canada said it is considering the impact of the central banks rate cut, but is not changing its mortgage products at this time. Scotiabank told CBC Newsit had not yet made a decision on whetherto cut its prime rate.
Our decision regarding our prime rate is impacted by factors beyond just the Bank of Canadas overnight rate, said MohammedNakhooda, a spokesman for TD Bank. Not only do we operate in a competitive environment, but our prime rate is influenced by the broader economic environment, and its impact on credit.
Holders of fixed-rate mortgages, of course, wont enjoy an immediate cut in monthly payments. Canadians taking out a new fixed-rate mortgage or renewing their old one right now could see rates edge down. Fixed mortgage rates are linked to long-term government bond yields. Those bondyields have already begun to fall in light of the Bank of Canadas interest rate cut.
Graham warned Canadian home buyers that what goes down, must come up.
When rates do eventually go up, when the economy recovers, [mortgageholders] are going to see their monthly debt servicing costs go up, said Graham. If they cant handle that, they could see themselves underwater on their mortgages.
2. Borrowing on lines of credit, credit cards
Like variable-ratemortgages, interest rates for lines of credit are generally tied to a banks prime interest rate, which is usuallytied to the Bank of Canadas overnight rate. That means Canadians borrowing money througha line of credit maysee their borrowing costs to come down,depending on whether their bank cuts its prime interest rate.
Canadians hoping for a break on their credit card bills, though, are out of luck.
Your credit card interest [rate] is actually a stated amount, explained Craig Alexander, chief economist at TD Bank. So when the Bank of Canada cuts rates or raises rates it doesnt have an influence on them.
As with mortgages, Canadians shouldnt necessarily take further advantage of cheaper borrowing costs just because they can.
CIBC deputy chief economist Benjamin Tal sees a potential risk to the Canadian economy if Canadians start racking up even more debt.A credit-fuelled spending spree is something that the Bank of Canada would like to avoid, saidTal.
Our debt-to-income ratio, at 165 per cent, is relatively high, said Tal. Thats a risk that the Bank of Canada is taking.
3. The loonie flies south
The Canadian dollar fell dramatically against a variety of major currencies as soon as the Bank of Canada made its announcement, and that means Canadians immediately have lesspurchasing power abroad. Thats bad news for snowbirds with homesin the U.S., or any Canadian planning an international trip.
If Canadians are wondering when to transfer money to a foreign bank account, they can try to take advantage of short-term volatility inexchange rates, according toKarlSchamotta, director of foreign exchange research at CambridgeMercantile Group.
Typically exchange rates do not follow a nice linear trend, saidSchamotta.Theres certainly potential to harness any gains that might occur over the coming months, but at the same time its very important to look at that overall backdrop and understand that the Canadian dollar is likely to remain depressed for a long period of time.
How long could thelooniefly so low?Schamottasees a clue inthe Bank of Canadas own outlook, which says lower oil prices will have an unambiguously negative effect on the Canadian economy for 2015 and beyond.
What were looking at here is a relatively bearish outlook for interest rates and for growth in Canada for at least a one- to two-year period here, and that is likely to keep the Canadian dollar contained, saidSchamotta.
That negative outlook could turn more positive, addedSchamotta, if some kind of geopolitical shock causes oil prices to surge once again.
4. No immediate effect on auto loans
Auto loans tend to be fixed-rate, not variable-rate. That means the Bank of Canadas interest rate cut wont have an immediate effect on auto financing, according to Canadian Auto Dealers Association chief economist Michael Hatch.
I dont think that tomorrowautomotive consumers are going to wake up necessarily to easier or harder financing conditions, said Hatch. Its going to remain par for the course.
Still, Hatch didnt rule out cheaper auto financing in the near future.Its a very competitive [interest rate]environment out there.It could well happen in the next few months, going into the spring selling season.
5. A bad time for savers
If you enjoy interest generated from a traditional savings account, the Bank of Canadas move isbad news for those returns.
We saw when the Bank of Canada cut interest rates during the last recession that interest rates on savings accounts went down almost linearly with the decline in the Bank of Canada overnight rate, said Randall Bartlett, senior economist at TD Economics.
Theres not going to be a massive change, but at the same time ifyoure notearning much interest before, youre going to be earning less interest now, added Bartlett.
This could be a good time for savers to think about changing their strategy, said Bartlett.
As interest on things like savings accountsand government debt comes down, at the same time it does provide incentives for people to invest in other types of assets that have higherreturns, said Bartlett. Things like stocks, ETFs, mutual funds tend to benefit from rate cuts as businesses take advantage of cheaper credit to make investments that could improve their share prices down the line.
Bank of Canada maintains overnight rate target at 1 ¾ per cent
The Bank of Canada today maintained its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 2 per cent and the deposit rate is 1 per cent.
Recent data suggest that the slowdown in the global economy has been more pronounced and widespread than the Bank had forecast in its January Monetary Policy Report (MPR). While the sources of moderation appear to be multiple, trade tensions and uncertainty are weighing heavily on confidence and economic activity. It is difficult to disentangle these confidence effects from other adverse factors, but it is clear that global economic prospects would be buoyed by the resolution of trade conflicts.
Many central banks have acknowledged the building headwinds to growth, and financial conditions have eased as a result. Meanwhile, progress in US-China trade talks and policy stimulus in China have improved market sentiment and contributed to firmer commodity prices.
For Canada, the Bank was projecting a temporary slowdown in late 2018 and early 2019, mainly because of last years drop in oil prices. The Bank had forecast weak exports and investment in the energy sector and a decline in household spending in oil-producing provinces. However, the slowdown in the fourth quarter was sharper and more broadly based. Consumer spending and the housing market were soft, despite strong growth in employment and labour income. Both exports and business investment also fell short of expectations. After growing at a pace of 1.8 per cent in 2018, it now appears that the economy will be weaker in the first half of 2019 than the Bank projected in January.
Core inflation measures remain close to 2 per cent. CPI inflation eased to 1.4 per cent in January, largely because of lower gasoline prices. The Bank expects CPI inflation to be slightly below the 2 per cent target through most of 2019, reflecting the impact of temporary factors, including the drag from lower energy prices and a wider output gap.
Governing Council judges that the outlook continues to warrant a policy interest rate that is below its neutral range. Given the mixed picture that the data present, it will take time to gauge the persistence of below-potential growth and the implications for the inflation outlook. With increased uncertainty about the timing of future rate increases, Governing Council will be watching closely developments in household spending, oil markets, and global trade policy.
The next scheduled date for announcing the overnight rate target is April 24, 2019. The next full update of the Banks outlook for the economy and inflation, including risks to the projection, will be published in the MPR at the same time.
Young people not in employment, education or training: What did they do in the past 12 months?
Young people (aged 15 to 29) who are not in employment, education or training (NEET) are often considered to be more vulnerable than their peers, as they may face a risk of becoming disengaged or socially excluded, and could miss out on gaining skills or experience in the labour market.
While Statistics Canada has previously examined the characteristics of the NEET population,1 this is the first study to examine the main activities of NEET15- to 29-year-olds over a 12-month period using Labour Force Survey (LFS) data. 2 Among the activities to be analyzed are going to school, working, caring for children, and volunteering both as a main and secondary activity.
Overall, there were 6.9 million young people aged 15 to 29 in Canada in September 2018. Of those, 4.0 million were non-students (57.8%), while 2.9 million were students 3 (42.4%). Both categories (students and non-students) are then divided into the employed and the not employed. The NEET population consists of all non-students who are not employed: in September 2018, 779,000 people were in this category (11.3% of the total population aged 15 to 29).
Those aged 25 to 29 comprised the largest proportion (46.8%) of young people who were NEET during the LFS reference week, followed by 20 to 24 (36.9%), and 15 to 19 (16.2%). While NEET individuals were slightly more likely to be female (52.1%) than male (47.9%) overall, those aged 15 to 19 were a few percentage points more likely to be male, and those aged 25 to 29 were similarly likely to be female.
Of young people who were NEET in September 2018, 34.5% were unemployed (looking for work and available for work), and 65.5% were inactive (not looking for work). While each of these groups may be at risk of falling behind their peers on work experience, this concern is generally greater for those who are inactive, as they may face challenges entering or re-entering the labour force.
Both male and female NEET individuals were more likely to be inactive than unemployed, though the share of women that were out of the labour force (72.2%) was greater than the share of men (58.2%).