Bank of Canada Interest Rates Stay at 1%
Sort of. On Tuesday, the Bank of Canada made its rate announcement and kept the rate unchanged at 1%. This is the rate at which banks borrow their money and base their variable rate mortgages on and signals another couple of months of incredible interest levels for those considering a variable rate mortgage. With the caveat that nothing lasts forever!
At the same time they made this announcement though (here comes the caveat) , they also signalled that there will be another rate hike coming and most insiders are projecting this to take place in the fall. This will likely be a small increase, but still it would affect variable rates and even lines of credit.
The Bank of Canada is facing a few challenges right now due to our extremely strong dollar and the threat of inflation. In a typical scenario, the government can deal with rising inflation by raising interest rates or in an effort to increase economic activity they can lower (or in our current case maintain) interest rates. The problem is they are caught in a delicate balancing act with opposing forces currently taking place.
We’ve seen the prices of just about everything increase in the last few months and this is putting direct pressure on the inflation numbers. Earlier in the year, inflation was being called subdued by the central bank, but in the recent announcement, it is now being termed “relatively subdued”. This change in wording is one of the indicators analysts are pointing to as an indication of pending rate increases to help keep inflation subdued.
The other part of the balancing act is the Canadian dollar. While the strength of our currency is a boon for travellers, it puts us at a disadvantage when we export products. As the dollar rises, the costs of our goods increase due to the exchange rates. If our exported goods become too expensive, the demand drops and our economy slows down.
The central bank would normally lower interest rates which would cause our currency to decrease in value and help stimulate more exports. Which brings us back to the balancing act as this also sets the stage for higher inflation.
Rather than do anything drastic, they are now just sitting on the sidelines and watching to see how the world economy fares over the next couple of months which will likely indicate where our rates will head. If they see further slowdown in the US economy and more economic concerns in Europe, rates will likely stay exactly where they are for a while longer.
If however, the world economy starts to gather more steam, this will put more pressure on the effect of inflation and leave the bank little choice but to start raising rates. The next scheduled announcement is coming up in July and then September, so the summer months will be very influential in where we go from here.
Investor Perspective – Mortgages
From my viewpoint, right now a Real Estate investor has to focus on cash flow, while at the same time protecting their future. With interest rates close to the lowest point we have seen there is nothing wrong with fixed rate mortgages.
However by looking at a variable rate you can typically save over 1.5% off your rate and perhaps more. I’ve seen some recent variable rates of around 2.2% lately which is incredible. While it’s not impossible, it’s quite unlikely that rates will increase 1.5% in the next couple of years, so this will give you a nice jump on getting your principle paid down while increasing your cash flow.
On the other hand if the thought of rates increasing cause you to break out into a cold sweat, go get yourself a fixed rate!
