Bank of Canada holds benchmark interest rate at 1%

Alyssa Furtado
by Alyssa Furtado January 18, 2011 / No Comments

Following the announcement of tighter mortgage regulations yesterday, Bank of Canada Governor Mark Carney held the benchmark interest rate at 1% today. This means the prime lending rate, the rate at which commercial banks lend to their most creditworthy customers, will also effectively remain intact. Variable mortgage holders can breathe a sigh of relief, as variable rates are based on the prime rate.

Variable mortgage rates are typically stated as a discount or premium to prime. Right now, the prime lending rate is 3% and the best available 5-year variable rate on Ratehub.ca is 2.1%, a .1% discount on prime.

Carney cited overseas uncertainty, the strong Canadian dollar and poor corporate productivity performance as factors holding back exports, necessitating a rate hold.

As the new mortgage regulations –reducing the maximum amortization to 30 years from 35 years and the refinancing maximum to 85% from 90% of home value, and freezing government-backed insurance on Home Equity Lines of Credit (HELOCs) – were introduced to curb distressing levels of Canadian household debt, the low benchmark rate can continue to act as a stimulus while discouraging excessive mortgage debt.

Superfluous borrowing at low interest rates is not sustainable, and the new mortgage regulations will encourage Canadian households to save more. On the other hand, economic stimulus remains intact with the low 1% benchmark interest rate.

Carney also previewed his Monetary Policy Update, to be released tomorrow, during the interest rate announcement, with the Canadian economy expected to grow 2.4% this year and 2.8% in 2012.