Reduction in Bank Interest Rates
In another attempt to stimulate the sluggish economy, the Bank of Canada cut the interest rate to 0.5%, the lowest ever.
In its announcement the Bank stated that this rate is to remain at its current level or lower until there are "clear signs" that the economy is recovering. This rate cut, the seventh in the last year, was widely expected by economists.
Commercial banks immediately began to follow suit. RBC Royal Bank quickly announced it is trimming its prime lending rate by 50 basis points to 2.5%. Other Canadian banks cut lending rates as well.
While rate cuts are designed to have a simulative effect on the economy, most experts believe the cut will have a minimal impact. The central bank has cut its rate from 4.5% 15 months ago to 0.5%, to little effect.
Many economists predict that it could take anywhere from 12 to 18 months for interest rate cuts to take effect, which means today's announcement won't provide immediate relief.
Those with existing variable rate mortgages will benefit directly - these mortgages are linked to the prime rate. However, there can be some variation in when, or to what degree, lenders react to a Bank of Canada rate announcement. There are lenders who change immediately after a Bank of Canada rate move, while some lenders re-set their prime rate on the first of the month following and some even do so quarterly. In addition, after recent rate announcements by the Bank, some lenders matched the Bank's drop only after a delay, and some did not match the full rate cut.
Currently, pricing for new variable-rate mortgages is typically above the prime rate. Those looking for a new variable-rate mortgage may wish to get pre-approved, to protect themselves if variable-rate pricing in relation to prime continues increase in the next few months.
Pricing for fixed-rate mortgages is not directly affected by the announcement. However, some fixed rates have been trending downward in recent weeks.