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.
Most First-Time Homebuyers Spending All They Can Afford
Millennials have made up a significant portion of homebuyers in recent years and based on the 2018 Mortgage Consumer Survey, they continue to do so, representing just under half (49%) of first-time buyer respondents. Although this is a decrease from 60% in 2017 and 58% in 2016, Millennials continue to influence and shape the homebuying and mortgage process.
Heres more of what we learned about Millennials and first-time buyers as a whole, powered by the 2018 Mortgage Consumer Survey.
What does the typical first-time buyer profile look like? Forty percent are married, 80% are employed full-time and about one-quarter (26%) have a household income between $60,000 and $90,000. A strong percentage of them were born outside of Canada, with 22% identifying as newcomers to Canada. Mortgage professionals can help meet the unique needs of newcomers with the support of CMHCs homebuying information which is available in 8 different languages.
The top 2 reasons first-time buyers bought a home: they wanted to get a first home and they felt financially ready. Although certain urban markets continue to exhibit high house prices and other barriers to entry, the survey found that 61% of first-time buyers bought a single-detached home. In fact, single-detached home was the top housing type purchased in all regions across Canada, except in British Columbia where condominium apartment was the most popular housing type.
The vast majority (85%) of first-time buyers spent the most they could afford on their home, compared to 68% of repeat buyers. This indicates that first-time buyers, including Millennials, may be stretching themselves financially to purchase their home. When it comes to the down payment, savings from outside an RRSP was the main source for first-time buyers. This suggest there is an opportunity to further educate first-time buyers about other options to help fund their down payment, such as the Government of Canadas Home Buyers Plan (HBP).
To get assistance with the mortgage process, first-time buyers contacted, on average, 2 brokers and 3 lenders. First-time buyer satisfaction levels with mortgage brokers and lenders remains high. However, mortgage professionals could further increase satisfaction levels by conducting more post-transaction follow-up and by providing clients with more information on closing costs, house purchase fees, interest rates, and steps involved in buying a home. CMHCs Step by Step guide is a valuable tool for mortgage professionals to share with homebuyers to ensure they feel confident throughout the entire homebuying process.
Bank of Canada increases overnight rate target to 1 ¾ per cent
The Bank of Canada today increased its target for the overnight rate to 1 per cent. The Bank Rate is correspondingly 2 per cent and the deposit rate is 1 per cent.
The global economic outlook remains solid. The US economy is especially robust and is expected to moderate over the projection horizon, as forecast in the Banks July Monetary Policy Report (MPR). The new US-Mexico-Canada Agreement (USMCA) will reduce trade policy uncertainty in North America, which has been an important curb on business confidence and investment. However, trade conflict, particularly between the United States and China, is weighing on global growth and commodity prices. Financial market volatility has resurfaced and some emerging markets are under stress but, overall, global financial conditions remain accommodative.
The Canadian economy continues to operate close to its potential and the composition of growth is more balanced. Despite some quarterly fluctuations, growth is expected to average about 2 per cent over the second half of 2018. Real GDP is projected to grow by 2.1 per cent this year and next before slowing to 1.9 per cent in 2020.
The projections for business investment and exports have been revised up, reflecting the USMCA and the recently-approved liquid natural gas project in British Columbia. Still, investment and exports will be dampened by the recent decline in commodity prices, as well as ongoing competitiveness challenges and limited transportation capacity. The Bank will be monitoring the extent to which the USMCA leads to more confidence and business investment in Canada.
Household spending is expected to continue growing at a healthy pace, underpinned by solid employment income growth. Households are adjusting their spending as expected in response to higher interest rates and housing market policies. In this context, household credit growth continues to moderate and housing activity across Canada is stabilizing. As a result, household vulnerabilities are edging lower in a number of respects, although they remain elevated.
CPI inflation dropped to 2.2 per cent in September, in large part because the summer spike in airfares was reversed. Other temporary factors pushing up inflation, such as past increases in gasoline prices and minimum wages, should fade in early 2019. Inflation is then expected to remain close to the 2 per cent target through the end of 2020. The Banks core measures of inflation all remain around 2 per cent, consistent with an economy that is operating at capacity. Wage growth remains moderate, although it is projected to pick up in the coming quarters, consistent with the Banks latest Business Outlook Survey.
Given all of these factors, Governing Council agrees that the policy interest rate will need to rise to a neutral stance to achieve the inflation target. In determining the appropriate pace of rate increases, Governing Council will continue to take into account how the economy is adjusting to higher interest rates, given the elevated level of household debt. In addition, we will pay close attention to global trade policy developments and their implications for the inflation outlook.