It appears lower mortgage rates are on the way – in its first downward movement since 2015, the Bank of Canada (BoC) has cut its trend-setting Overnight Lending Rate by 0.5% to 1.25%. That’s to an extent not seen since the 2008 – 2009 global financial crisis, and comes as a direct response to the economic fallout from the spread of the coronavirus COVID-19.
The BoC says that while Canada’s economy has been performing well and that inflation remains on track, “the COVID-19 virus is a material negative shock to the Canadian and global outlooks and monetary and fiscal authorities are responding.”
Central Banks Around the World Responding to Virus Risk
The BoC’s cut comes just one day after its American counterpart, the U.S. Federal Reserve, made the same move, slashing its benchmark rate 50 points to a range between 1 – 1.25%. As well, Canada is a part of the G7 group of finance ministers that announced they would introduce stimulus in major economies around the world to help ease market shocks. It’s widely expected the European Central Bank will be next to cut rates in its announcement to come mid-March.
Risks Too Great to Canadian Economy, Despite Other Growth
Despite this, Canada’s cut comes as a surprise to a number of economists who had maintained the BoC would continue to hold out on making a downward move while others cut, as it did throughout the global trade struggles of 2019. According to the regular poll conducted by Reuters prior to rate announcements, 60% – 20 of 34 – of economists thought rates would be held until the end of 2020.
However, the BoC states that the downward risk to the economy is just too strong to avoid taking stimulus action; keeping interest rates low is a key method used to keep credit flowing and consumers spending during times of economic downturn, helping to prop up consumption and growth.
“…COVID-19 represents a significant health threat to people in a growing number of countries. In consequence, business activity in some regions has fallen sharply and supply chains have been disrupted,” stated the BoC. “This has pulled down commodity prices and the Canadian dollar has depreciated. Global markets are reacting to the spread of the virus by repricing risk across a broad set of assets, making financial conditions less accommodative. It is likely that as the virus spreads, business and consumer confidence will deteriorate, further depressing activity.”
According to the latest data, the impacts are already being felt. Q1 2020 is shaping up to be weaker than forecast with sluggish business investment despite recent positive trade policies put in place early this year. As well, the BoC points to the recent spate of rail line blockades, poor weather, and Ontario teacher strikes as other factors weighing on the economy.
It reports that Q4 2019 Canadian GDP slowed to 0.3% growth despite strong consumption, labour market incomes, and growing demand for MLS listings in Canada; business investment and exports have just weakened too much to allow these other positive developments to make a dent. Inflation, however, has stuck close to its 2% target.
More Rates Cuts Possible This Year
And, depending on how the spread of the virus unfolds, the BoC has left the door open to more cuts in the future, stating, “In light of all these developments, the outlook is clearly weaker now than it was in January. As the situation evolves, Governing Council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target. While markets continue to function well, the Bank will continue to ensure that the Canadian financial system has sufficient liquidity.”
What Does This Mean for Mortgage Borrowers?
Because Canada’s big six banks take their cues directly from the Bank of Canada’s rate when setting their variable mortgage prices (via their Prime rates), those with variable home financing will see a reduction in either their monthly mortgage payments, or see more of their payments go toward their mortgage principal. It will also be an advantageous time for those renewing or refinancing their mortgages to explore cheaper variable rate options, as it doesn’t appear the BoC will resume their upward rate trajectory any time soon.
UPDATE: As of March 5, 2020, Royal Bank, Toronto Dominion Bank, Scotiabank, Bank of Montreal, CIBC, and Desjardins Group have factored the BoC’s rate cut into their own Prime rates, down 50 basis points to 3.45%.
While today’s rate climate won’t impact those already locked into fixed-rate mortgage terms – those remain untouched until the mortgage comes up for renewal or refinancing – those on the market for a new fixed rate will enjoy greater discounts than in months past. That’s due to the impact of COVID-19 on financial markets, namely, driving investors into the relative safety of the bond market. That has pushed the yield on government bonds to new lows – five-year bonds are yielding 0.8% as of this week, a low not seen since 2016. As lenders take their pricing cues for fixed-rate products from bond yields, this means borrowers of all stripes are likely to have access to overall lower rates across the board when financing their home purchase.
The next Bank of Canada announcement, and release of its Monetary Policy Report, will be April 15, 2020.