What the Bank of Canada's rate cut means for homebuyers

This story has been updatedThe Bank of Canada made a surprise move yesterday by announcing a rate cut to its overnight rate by one-quarter of one percentage point to 0.75 per cent. Most economists expected the Bank, if anything, to increase the rate, which had sat at one per cent since September 2010. Instead, it lowered the rate in response to the recent sharp drop in oil prices, which is acting as a drag on economic growth.

"What the Bank of Canada is essentially telling us is that they are more concerned about the global demand for oil and the economic implications for the country, than they are about the elevated housing prices – to them, housing value is essentially the lesser of two evils," Calum Ross, Toronto-based mortgage broker, told New Home & Condo Guide."What consumers need to realize is that anytime interest rates go down, real asset prices go up (especially real estate). It’s always important to keep in mind – people buy payment, not house prices. What we are seeing right now is that the bond markets – the Government of Canada bond markets, more specifically – which is what interest rate mortgages are priced off of, have had a significant three-day slide."

Now, the question is whether Canada’s major banks will follow suit and with mortgage rate cuts. As of Thursday morning, none of the major banks had announced a rate cut, but holders of variable rate mortgages would be among the first to benefit if they take such action. Even if the banks don't implement their own rate cuts, the BoC's action supports the continuation of ultra-low mortgage rates, when many experts expected rates to inch up with this latest announcement.Variable-rate mortgages are determined by the prime interest rate, which is linked to the BoC’s overnight rate. This time, the major banks seem to be weighing overall economic health, as well as competitive factors, more so than usual before dropping their rates.

BoC is now forecasting real GDP growth will slow to about 1.5 per cent in the first half of 2015, before Canada’s economy gradually strengthens in the second half of the year. The bank is projecting real GDP growth will average 2.1 per cent in 2015 and 2.4 per cent in 2016.The economy is expected to return to full capacity around the end of 2016.Although there is considerable uncertainty around the outlook, the Bank is projecting. The negative impact of lower oil prices will gradually be mitigated by a stronger U.S. economy, a weaker Canadian dollar, and the Bank’s monetary policy response.

The oil price shock is occurring against a backdrop of solid and more broadly-based growth in Canada in recent quarters, BoC says.“Outside the energy sector, we are beginning to see the anticipated sequence of increased foreign demand, stronger exports, improved business confidence and investment and employment growth.”The Bank’s next rate announcement is March 4.

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