Bank of Canada; Saving Green

March 22, 2019 | Posted by: Harold Hagen

Up till now, BoC Governor Stephen Poloz had stated repeatedly that the overnight rate (currently at 1.75%) would need to reach the Bank’s “neutral range” target of 2.5-3.5%.

“Neutral rate” is the rate of interest at which real GDP is growing at its trend rate, and inflation is stable.” - Investopedia

But the BoC changed its tenor this earlier this month when they held the overnight lending rate at 1.75%.

Reasons include:

-       weaker-than-expected slowdown in economic activity in the fourth quarter

-       indications that the Canadian economy will be weaker in the first half of 2019 than the Bank projected bank in January.

We’ve already seen all major banks drop fixed interest rates over the past several weeks.

We have seen a precipitous drop in the 5-year yield Bond yield (which typically drives FIXED rate pricing) from its high back in Oct 2018 (2.48%) to its current yield of 1.49% (March 22, 2019).

With most 5-year fixed mortgage rates still at a higher spread (to the 5-year bond yield) than what is typical, we anticipate more fixed rate cuts to come (180+bps, normal range closer to 150-160 bps above the 5-year yield).

With these anticipated fixed rate decreases, the fixed rate will become a more attractive options for new mortgage borrowers as it would be within 0.50% of the Variable rate (currently Prime – 1.0%).

So for now, it looks like the spring buy/sell real estate market will get a little help with promise of lower interest rates.

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