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Bank of Canada Rate Announcement Oct 28th, 2020
Diane Buchanan • Oct 28, 2020
The Bank of Canada today maintained its target for the overnight rate at the effective lower bound of ¼ percent, with the Bank Rate at ½ percent and the deposit rate at ¼ percent. The Bank is maintaining its extraordinary forward guidance, reinforced and supplemented by its quantitative easing (QE) program. The Bank is recalibrating the QE program to shift purchases towards longer-term bonds, which have more direct influence on the borrowing rates that are most important for households and businesses. At the same time, total purchases will be gradually reduced to at least $4 billion a week. The Governing Council judges that, with these combined adjustments, the QE program is providing at least as much monetary stimulus as before.
The global and Canadian economic outlooks have evolved largely as anticipated in the July Monetary Policy Report (MPR), with rapid expansions as economies reopened giving way to slower growth, despite considerable remaining excess capacity. Looking ahead, rising COVID-19 infections are likely to weigh on the economic outlook in many countries, and growth will continue to rely heavily on policy support.
In the United States, GDP growth rebounded strongly but appears to be slowing considerably. China’s economic output is back to pre-pandemic levels and its recovery continues to broaden. Emerging-market economies have been hit harder, especially those with severe outbreaks. The recovery in Europe is slowing amid mounting lockdowns. Overall, global GDP is projected to contract by about 4 percent in 2020 before growing by just over 4 ½ percent, on average, in 2021–22.
Oil prices remain about 30 percent below pre-pandemic levels. Meanwhile, non-energy commodity prices, on average, have more than fully recovered. Despite continued low oil prices, the Canadian dollar has appreciated since July, largely reflecting a broad-based depreciation of the US dollar.
In Canada, the rebound in employment and GDP was stronger than expected as the economy reopened through the summer. The economy is now transitioning to a more moderate recuperation phase. In the fourth quarter, growth is expected to slow markedly, due in part to rising COVID-19 case numbers. The economic effects of the pandemic are highly uneven across sectors and are particularly affecting low-income workers. Recognizing these challenges, governments have extended and modified business and income support programs.
After a decline of about 5 ½ percent in 2020, the Bank expects Canada’s economy to grow by almost 4 percent on average in 2021 and 2022. Growth will likely be choppy as domestic demand is influenced by the evolution of the virus and its impact on consumer and business confidence. Considering the likely long-lasting effects of the pandemic, the Bank has revised down its estimate of Canada’s potential growth over the projection horizon.
CPI inflation was at 0.5 percent in September and is expected to stay below the Bank’s target band of 1 to 3 percent until early 2021, largely due to low energy prices. Measures of core inflation are all below 2 percent, consistent with an economy where demand has fallen by more than supply. Inflation is expected to remain below target throughout the projection horizon.
As the economy recuperates, it will continue to require extraordinary monetary policy support. The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In our current projection, this does not happen until into 2023. The Bank is continuing its QE program and recalibrating it as described above. The program will continue until the recovery is well underway. We are committed to providing the monetary policy stimulus needed to support the recovery and achieve the inflation objective.
The next scheduled date for announcing the overnight rate target is December 9, 2020. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on January 20, 2021.
If you’re like most Canadians, chances are you don’t have enough money in the bank to buy a property outright. So, you need a mortgage. When you’re ready, it would be a pleasure to help you assess and secure the best mortgage available. But until then, here’s some information on what to consider when selecting the best mortgage to lower your overall cost of borrowing. When getting a mortgage, the property you own is held as collateral and interest is charged on the money you’ve borrowed. Your mortgage will be paid back over a defined period of time, usually 25 years; this is called amortization. Your amortization is then broken into terms that outline the interest cost varying in length from 6 months to 10 years. From there, each mortgage will have a list of features that outline the terms of the mortgage. When assessing the suitability of a mortgage, your number one goal should be to keep your cost of borrowing as low as possible. And contrary to conventional wisdom, this doesn’t always mean choosing the mortgage with the lowest rate. It means thinking through your financial and life situation and choosing the mortgage that best suits your needs. Choosing a mortgage with a low rate is a part of lowering your borrowing costs, but it’s certainly not the only factor. There are many other factors to consider; here are a few of them: How long do you anticipate living in the property? This will help you decide on an appropriate term. Do you plan on moving for work, or do you need the flexibility to move in the future? This could help you decide if portability is important to you. What does the prepayment penalty look like if you have to break your term? This is probably the biggest factor in lowering your overall cost of borrowing. How is the lender’s interest rate differential calculated, what figures do they use? This is very tough to figure out on your own. Get help. What are the prepayment privileges? If you’d like to pay down your mortgage faster. How is the mortgage registered on the title? This could impact your ability to switch to another lender upon renewal without incurring new legal costs, or it could mean increased flexibility down the line. Should you consider a fixed rate, variable rate, HELOC, or a reverse mortgage? There are many different types of mortgages; each has its own pros and cons. What is the size of your downpayment? Coming up with more money down might lower (or eliminate) mortgage insurance premiums, saving you thousands of dollars. So again, while the interest rate is important, it’s certainly not the only consideration when assessing the suitability of a mortgage. Obviously, the conversation is so much more than just the lowest rate. The best advice is to work with an independent mortgage professional who has your best interest in mind and knows exactly how to keep your cost of borrowing as low as possible. You will often find that mortgages with the rock bottom, lowest rates, can have potential hidden costs built in to the mortgage terms that will cost you a lot of money down the road. Sure, a rate that is 0.10% lower could save you a few dollars a month in payments, but if the mortgage is restrictive, breaking the mortgage halfway through the term could cost you thousands or tens of thousands of dollars. Which obviously negates any interest saved in going with a lower rate. It would be a pleasure to walk you through the fine print of mortgage financing to ensure you can secure the best mortgage with the lowest overall cost of borrowing, given your financial and life situation. Please connect anytime!
If you're looking to buy a new property, refinance, or renew an existing mortgage, chances are, you're considering either a fixed or variable rate mortgage. Figuring out which one is the best is entirely up to you! So here's some information to help you along the way. Firstly, let's talk about the fixed-rate mortgage as this is most common and most heavily endorsed by the banks. With a fixed-rate mortgage, your interest rate is "fixed" for a certain term, anywhere from 6 months to 10 years, with the typical term being five years. If market rates fluctuate anytime after you sign on the dotted line, your mortgage rate won't change. You're a rock; your rate is set in stone. Typically a fixed-rate mortgage has a higher rate than a variable. Alternatively, a variable rate is not set in stone; instead, it fluctuates with the market. The variable rate is a component (either plus or minus) to the prime rate. So if the prime rate (set by the government and banks) is 2.45% and the current variable rate is Prime minus .45%, your effective rate would be 2%. If three months after you sign your mortgage documents, the prime rate goes up by .25%, your rate would then move to 2.25%. Typically, variable rates come with a five-year term, although some lenders allow you to go with a shorter term. At first glance, the fixed-rate mortgage seems to be the safe bet, while the variable-rate mortgage appears to be the wild card. However, this might not be the case. Here's the problem, what this doesn't account for is the fact that a fixed-rate mortgage and a variable-rate mortgage have two very different ways of calculating the penalty should you need to break your mortgage. If you decide to break your variable rate mortgage, regardless of how much you have left on your term, you will end up owing three months interest, which works out to roughly two to two and a half payments. Easy to calculate and not that bad. With a fixed-rate mortgage, you will pay the greater of either three months interest or what is called an interest rate differential (IRD) penalty. As every lender calculates their IRD penalty differently, and that calculation is based on market fluctuations, the contract rate at the time you signed your mortgage, the discount they provided you at that time, and the remaining time left on your term, there is no way to guess what that penalty will be. However, with that said, if you end up paying an IRD, it won't be pleasant. If you've ever heard horror stories of banks charging outrageous penalties to break a mortgage, this is an interest rate differential. It's not uncommon to see penalties of 10x the amount for a fixed-rate mortgage compared to a variable-rate mortgage or up to 4.5% of the outstanding mortgage balance. So here's a simple comparison. A fixed-rate mortgage has a higher initial payment than a variable-rate mortgage but remains stable throughout your term. The penalty for breaking a fixed-rate mortgage is unpredictable and can be upwards of 4.5% of the outstanding mortgage balance. A variable-rate mortgage has a lower initial payment than a fixed-rate mortgage but fluctuates with prime throughout your term. The penalty for breaking a variable-rate mortgage is predictable at 3 months interest which equals roughly two and a half payments. The goal of any mortgage should be to pay the least amount of money back to the lender. This is called lowering your overall cost of borrowing. While a fixed-rate mortgage provides you with a more stable payment, the variable rate does a better job of accommodating when "life happens." If you’ve got questions, connect anytime. It would be a pleasure to work through the options together.
DIANE BUCHANAN
Mortgage Broker
diane@dianebuchanan.ca
250-302-2276
#5 - 160 Oliver Street, Williams Lake BC V2G 1L8