The overnight lending rate is staying put – for now

The Bank of Canada today announced it would leave its overnight lending rate at 0.75 per cent – for six more weeks, anyway. The rate has sat at this position only since Jan. 21, when the central bank made an unexpected rate cut, after holding it at one per cent for nearly 4.5 years.The drop in 0.25 percentage points in January came as a surprise, as most economists had been predicting the opposite would occur some time in 2015. It was BoC’s way of attempting to shield highly indebted Canadians from the negative impacts in the energy sector, caused by the sharp drop in oil prices in the latter half of 2014. But it was also a signal for banks to drop their Prime rates, to stimulate the economy as a whole.The banks expressed concern that dropping their rates would cause Canadians to take on more debt they couldn’t afford to repay, versus help those who were feeling the inch, so initially they chose not to budge. Eventually, they all dropped their Prime rates by 0.15 per cent, from three per cent to 2.85 per cent, but none have made a full 0.25-per-cent cut, as suggested by the central bank’s move.According to our mortgage calculator, the additional 0.10 per cent that’s missing could lower our best five-year variable rate from two per cent to 1.9 per cent, which would result in a savings of $18/month or $1,080 over five years on a $400,000 home (the average price in Canada), with 10 per cent down and a 25-year mortgage. That may not sound like much, but it hurts to think about, when you know the banks have control and are choosing not to do it.All of this is to say that some people predicted the Bank of Canada would further cut the overnight lending rate today, potentially by an additional 0.25 per cent. However, Governor Stephen Poloz announced this morning that data from 2014 suggests we’ll see stronger growth in non-energy exports and investments in 2015, and the central bank wants to wait and see how the economy responds to the first rate cut of the year, before making any further moves.So, the overnight lending rate – and therefore Prime rates and your variable mortgage rates – are going to stay put. For now. But if the economy declines, we may see another cut. And if things continue to get better, we may see it go back up to one per cent – or more.Related reading:Lower interest rates an opportunity to pay down debt soonerWhat the Bank of Canada's rate cut means for homebuyersAfter a good 2014, what can we expect from mortgages in 2015?