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Bank of Canada Interest Rate Announcement: September 7, 2011

For the eighth consecutive time, the Bank of Canada has kept the overnight lending rate constant at 1.00%. This is great news if you’ve got a variable rate: since the prime lending rate remains untouched, so do lender variable rates.

In the days leading up to the announcement, economists and banks alike correctly predicted that no adjustment would be made to the key interest rate – primarily to maintain stimulus within the economy.

The first indication was the Canadian second quarter GDP, which demonstrated a 0.4% decline as opposed to the forecasted 1.5% growth [1].The predicted growth seemed achievable in July and was, for the most part, the reason for an anticipated rate hike in September.

The GDP drop can be explained in part by the economic conditions in Europe and the United States, demonstrating the significant impact they have on Canada’s economy [2].

The July 19 interest rate announcement, which left the key rate unchanged,was followed by the pledge to withdraw some of the “considerable monetary stimulus” with the stipulation of domestic economic progress and improvement in the European debt crisis [1]. A rate hike did not seem far off; however, with the contraction in GDP in the second quarter as well as the lack of progress in sovereign debt issues in Europe, the Bank of Canada was left with little choice but to maintain caution this time around.

The next move would be for the Bank to hike rates, but that is not expected until the middle of 2012 based on forecasts in the global economy. Instead, now may be the time for fiscal policies to be introduced [1].

For the Bank of Canada to raise rates, we’ll need to see any combination of the following:

– Faster overall growth in the Canadian economy

– Increased employment levels and job growth

– A healthy Canadian housing market

– Improvement in the U.S. economy

Although the Canadian economy isn’t completely joined at the hip to our neighbours south of the border, at least 70% of our exports are bought by the United States [2]. We need U.S. demand to increase, but we can expect the U.S. economy to continue to struggle, especially as their fiscal stimulus depletes.

How will this announcement affect your mortgage?

Variable mortgage rates will continue to remain at their current low levels. The current economic stance indicates that variable borrowers will be able to enjoy low interest rates well into next year.

However, keep in mind that this low-rate environment is temporary and not economically sustainable in the long term. Consequently, it is advisable to budget for higher mortgage payments in the future or use a higher interest rate such as a five-year fixed rate as a benchmark.

As for fixed mortgage rates, they are currently hovering around 3.50%. The lowest five-year fixed rate is currently 3.24%.

Recently, in a move to recapture profit margins, the major Canadian banks have taken it upon themselves to reduce discounts on variable mortgage rates (rates could previously be found for prime -0.90 or even -0.95, but are closer to -0.75 now). This has increased variable rates slightly, but they are still nearly a full percentage point below their fixed counterparts, and will continue to stay low for the foreseeable future.