As expected, the Bank of Canada (BoC) announced today that the target overnight rate will remain at 1.00%. This means the Prime rate will also remain unchanged. Variable mortgages are priced at a discount or premium to Prime (+/- Prime), so variable mortgage holders will see no changes to their interest rate or mortgage payments.
Continued weak economic indicators in Canada and the US, as well further European financial deterioration led the BoC Governor Mark Carney to keep the overnight rate the same for the eleventh consecutive interest rate announcement. The last time the Bank of Canada moved the overnight rate was in September of 2010.
In December, the Bank of Canada released their semi-annual Financial System Review, which revealed the key risks to the stability of the Canadian economy. [see below]
*chart sourced from the Bank of Canada
The main risk to Canadian financial stability is the rising global sovereign debt which has increased rapidly over the past six months. Standard & Poor, one of the biggest credit rating agencies in the world, recently downgraded the European bailout fund from its AAA status to AA+, casting further doubt over the economic recovery in Europe. This was in response to S & P’s downgrade of nine Eurozone countries last week, including the all-important AAA credit rating of France, a major Eurozone economy. [i]
So, it appears the Bank of Canada has little flexibility to raise interest rates anytime soon.
Many economists, including Diana Petramala of TD Bank, predict the Bank of Canada is unlikely to change the overnight rate for the rest of the year.[ii]
Others , like the C.D. Howe Institute’s Monetary Policy Council predict the overnight rate will increase to 1.25% in a year’s time.[iii]
Assuming the target overnight rate will stay steady in 2012, Canadians can expect mortgage rates in Canada to remain in the current low-rate environment.
Keep in mind, however, we have seen variable mortgage rates rise in recent months due to lenders reducing the discount or even adding a premium to the Prime Rate. This is a reflection of lenders’ profit objectives as well as some uncertainty surrounding current economic conditions. Borrowers considering a variable mortgage now should be aware there is only a small spread between fixed and variable mortgage rates, eliminating much of the financial advantage of a variable mortgage.