Bank of Canada Holds Steady on Key Interest Rate 

The Bank of Canada announced this morning that it will leave its key interest rate unchanged, a decision that was expected by many economists. 

As a result of the Bank’s decision, lending institutions in Canada are expected to keep their prime lending rate steady.  The prime used by lenders is the base rate that they use in pricing loans to their most creditworthy customers.  Variable-rate mortgages, variable-rate credit cards, and home equity lines of credit are typically linked to a lender’s prime rate.  For example, a competitive variable rate mortgage has been available recently with some lenders at their prime rate minus 0.60%. 

Pricing for fixed-rate mortgages is not directly affected by today’s announcement. 

New Mortgage Rules

New Mortgage Rules Announced 

The Department of Finance announced last week that it would change some of the rules for new high-ratio mortgages in Canada.  Most notably, for new mortgages with government-backed mortgage insurance policies (whether issued by the Canada Mortgage and Housing Corp. or private insurers), the maximum amortization will be 35 years, and the minimum down payment will be five per cent (borrowers may borrow their five per cent down payment, but it will not be insured). 

While these changes are slated to take effect on October 15, 2008, some lenders have announced that they are adjusting their maximum amortization to 35 years for new mortgages immediately. 

PRESS RELEASE FROM THE BANK OF CANADA

Bank of Canada keeps overnight rate target at 3 per cent

OTTAWA – The Bank of Canada today announced that it is maintaining its target for the overnight rate at 3 per cent. The operating band for the overnight rate is unchanged, and the Bank Rate remains at 3 1/4 per cent.

Three major developments are affecting the Canadian economy: the protracted weakness in the U.S. economy; ongoing turbulence in global financial markets; and sharp increases in many commodity prices. The first two developments are evolving roughly in line with expectations in the April Monetary Policy Report. However, commodity prices are continuing to outstrip earlier expectations. This has led to further increases in Canada‘s terms of trade and real national income, and has altered the outlook for global and domestic inflation.

Although Canadian economic growth in the first quarter was weaker than expected, final domestic demand continues to expand at a solid pace. The economy is judged to have moved into slight excess supply in the second quarter of this year; excess supply is expected to increase over the balance of the year. High terms of trade, accommodative monetary policy, and a gradual recovery in the U.S. economy are expected to generate above-potential growth starting early next year, bringing the economy back to full capacity around mid-2010. Canadian GDP is projected to grow by 1.0 per cent in 2008, 2.3 per cent in 2009, and 3.3 per cent in 2010.

Total CPI inflation over the next year is expected to be much higher than projected at the time of the April Report. Assuming energy prices follow current futures prices over the projection period, total CPI inflation is projected to rise temporarily above 4 per cent, peaking in the first quarter of 2009. As energy prices stabilize and with medium-term inflation expectations remaining well anchored, total inflation is then projected to converge to the core rate of inflation at the 2 per cent target in the second half of 2009. Core inflation is projected to remain well contained and broadly in line with earlier expectations, averaging close to 1.5 per cent through the third quarter of this year and then rising to 2 per cent in the second half of 2009.

The three major developments affecting the Canadian economy pose significant upside and downside risks to the Bank’s base-case projection. Weighing the implications of these, the Bank views the risks to its base-case projection for inflation as balanced.

Against this backdrop, the Bank judges that the current level of the target for the overnight rate remains appropriate. The Bank will continue to monitor carefully the evolution of risks, together with economic and financial developments in the Canadian and global economies, and set monetary policy consistent with achieving the inflation target over the medium term.

The Bank’s detailed projection for the economy and inflation, and its assessment of risks to the projection, will be published in the Monetary Policy Report Update on 17 July 2008.

Information note:

The Bank of Canada’s next scheduled date for announcing the overnight rate target is 3 September 2008.