Canada’s Key Lending Rate Headed Higher

The Bank of Canada has lifted its key lending rate by 1/4 percentage point, to 0.75%.

The Bank had this to say in its written statement:

  • “The global economic recovery is proceeding but is not yet self-sustaining.”
  • “Housing activity is declining markedly from high levels, consistent with the Bank’s view…”
  • “The Bank now expects the economy to return to full capacity at the end of 2011, two quarters later than had been anticipated in April.”
  • “Both total CPI and core inflation are expected to remain near 2 per cent throughout [2011].”

Bank-of-Canada-Overnight-Target-RateThe above chart (Click to enlarge) shows just how low Canada’s overnight rate is when compared to the last 10 years. Accordingly, the BoC says today’s new 0.75% rate “leaves considerable monetary stimulus in place.”

The mortgage industry now awaits confirmation from the Big 5 banks that prime rate will follow 25 basis points higher. The banks typically announce prime rate increases the same day as BoC rate hikes. The last time around (on June 1), TD Bank was the first to act, raising its prime rate at 1:32pm ET.

Bond yields, which affect fixed mortgage rates, were down across the curve following today’s BoC statement.

As of this writing, the 5-year yield has sunk to 2.31%, just a few basis points above its one-year low of 2.29%. Given that many were awaiting today’s announcement for an indicator of rate direction, we may now see 5-year fixed rates drift slightly lower in the near term.

The next Bank of Canada interest rate meeting is September 8.

  1. See here is another nail in the coffin for our economy and real estate sector. Mark Carney is suffering from low interest rate phobia and needs to stop taking orders from the ‘experts’.

  2. Before this announcement there was a lot of talk about how a rate increase wasn’t certain, and now that’s been re-iterated for the next meeting. However it’s interesting to note that (as reported this morning) the loonie dropped despite higher rates – because of the statement that further rate increases aren’t certain. If the central bank keeps talking like this and raising rates anyways they may avoid some of the negative side-effects that brings.
    Of course no one can be sure what global events will happen before September and affect the economic outlook, but there may be more to the central bank’s strategy than saying exactly what they see.

  3. FYI – the 5-year gov’t bond yield has hit 2.28% this morning, the lowest since May 2009! But are mortgage rates at the lowest since May 2009? Nowhere near …

  4. Artificially low interest rates for sustained periods cause all sorts of unhealthy distortions in the real economy. Bubbles in leveraged assets like housing are but one example… The faster rates are normalized, the better.

  5. The economics of today is unlike that of yesteryear, so what’s normal? Japan held near zero rates for the better part of a decade. Don’t you think this could happen here? Once balance between fixed and variable debt is attained in the Canadian mortgage pool the BOC could pull it’s support on rates as the economy begins it’s second dip.

  6. Hi Everyone, I was hoping some of you might be able to help me better understand what is going on. This mornings inflation numbers dropped again, for the second or third month in a row I believe. I thought the BoCs mandate was to use its overnight rate to influence inflation and other factors were secondary (ie. the dollar, bonds, markets, etc.) to inflation. Doesn’t it seem weird that while inflation is going down (relatively fast) and there is strong talk of even deflation in the future, they are raising interest rates? The core CPI hasn’t been hit as hard, so does that mean they use core CPI for determining when to move the O/N rate? The only argument that comes to mind for rate hiking is to curtail consumer spending fueled by debt and mortgages. However, wouldn’t there be better way to accomplish this? Say by making it hard to get a mortgage or credit cards or setting a cap on household credit limits or something like that? Because if they are using the O/N rate to influence these factors, might it not have a negative effect on their PRIMARY goal, which is inflation? Another thing I was thinking was that they could be reacting to the spring: stronger stock and global markets, strong housing, stronger CPI. Does that mean that monetary policy is somewhat of a reverse looking and lagging event, rather than forward looking? If that is so, it seems like they might be forced to lower rates again in the future to account for today’s environment.
    [This post was moved to this thread from the thread “Pre-Paying a Mortgage Before Discharge”. – CMT]

  7. Yes. The BOC uses core CPI as an operational guide to policy.
    They are also very forward looking. Today’s overnight rate is meant to impact inflation 12-18 months from now. Current inflation rates probably don’t have a great impact on the BOC’s view of inflation in 2011 and 2012.

Your email address will not be published. Required fields are marked *

More Stories
canadian home prices october 2020
The Latest in Mortgage News: Mortgage Debt Soars as Credit Card Debt Falls to 6-Year Low
Copy link