Bank of Canada Lower Rates - What Just Happened?
In a total surprise move, unless you've been watching bond yields and/or the price of oil lately, the Bank of Canada dropped it's overnight rate to 0.75%.
Why Did That Happen?
- Oil prices are dropping like a rock. This is bad for the oil sector and large parts of the Canadian economy. Not everyone...but lots of us can be affected by this.
- Inflation is dropping like a rock. This is due to #1. It also puts downward pressure on wages.
- Layoffs and store closings are starting to happen. This also hurts the economy. More unemployment, wage cuts, less disposable income, more bankruptcies, and more can be the result.
- All of the above means lower rates are the medecine to help keep the cash flowing in the economy. At least...that's the thinking.
What Does it Mean For Me?
- If you have a variable rate mortgage already, then your rate will go down by .25%
- If your'e getting a mortgage of any kind anytime soon, congratulations...your rate will be lower than you expect. (This applies to fixed rates too. Bond yields are a more direct relative of fixed rate mortgages, but they usually anticipate what the Bank of Canada will do.)
- Any other type of borrowing will likely have lower variable and fixed rates associated with it.
- If you make money in Canadian dollars then our condolences, you're poorer today.
- The negative effects of the oil price shock in the broader economy will likely be offset by growing global economic growth, a lower Canadian dollar (that's why you're poorer), and a stronger export sector.
What Should I do About It?
- If you don't have a lot of debt, or any, then congratulations. Keeping it that way might be a good idea.
- That said, if you have an opportunity to invest and earn a good return while borrowing to do so at a "basically free money" rate like now, then this may be an opportunity for you. Tread carefully though!
- If you have a variable rate mortgage, keep riding the good times.
- If you have a fixed rate mortgage above 3% or so, there might be an argument for refinancing to lock in a lower / longer fixed rate or going variable for the time being. There's some math to do here to determine whether or not paying a penalty makes sense, but it's worth a phone call. Feel free to call one of our mortgage brokers anytime to discuss.