Posted on
September 18, 2024
by
The Linda Maguire Team
The pandemic and its economic aftermath showed us just how much the Bank of Canada’s monetary policy affects our daily lives - from spending habits to the housing market, job creation, and even the cost of bread. However, many of us are unfamiliar with the Bank’s role and functions. Let's dive into some basics.
Although the Bank of Canada has several core functions, today, we'll focus solely on Monetary Policy, which aims to promote the economic and financial well-being of all Canadians. Inflation targeting helps achieve this by maintaining low and stable inflation. During economic slumps, the Bank can lower rates to stimulate the economy. Conversely, if the economy overheats and inflation rises, the Bank will raise rates to cool the market.
With their 2% Inflation Target Rate as the goal, they mainly achieve this in two ways:
1 - Adjustment of the short-term interest rate: This affects the overnight lending rate, which affects the Prime Rate. The Bank of Canada makes 8 rate announcements per year.
Impact on You:
Variable/Adjustable Rate Products: Products linked to the Prime Rate, such as lines of credit, mortgages, and car loans, will see changes in monthly payments based on rate adjustments.
Housing Market: Interest rates directly impact your ability to qualify for a home. Higher rates mean less mortgage qualification, affecting home prices. Cheaper borrowing increases demand, causing prices to rise. It’s often better to purchase with a higher rate and shorter term than to wait for rates to drop and pay more for a home.
2 - Quantitative Easing and Tightening:
Quantitative easing (QE), the purchase of government securities such as bonds, increases the money supply to financial institutions, making borrowing cheaper. When there is no more room for decreases in the overnight lending rate, they will employ this strategy, as they did at the beginning of the pandemic.
Impact on You:
Fixed Rates: QE impacts long-term interest rates by increasing the demand for government securities, lowering their yields. Since fixed mortgage rates are tied to long-term bond yields, QE typically leads to lower fixed mortgage rates.
Quantitative Tightening is the opposite of this and is currently what the BoC is using. It involves allowing government securities to mature without reinvestment, thereby reducing money circulation, curbing inflation, and slowing the economy.
The job of the Bank of Canada can be precarious and slow, as it needs to walk a fine line between avoiding unintended inflation and providing much-needed interest rate relief. Earlier this month, the Bank decreased the overnight rate by 25 basis points, which lowered our prime rate to 6.45%. For variable-rate mortgages with static payments, your payment will remain the same, but the portions applied to principal and interest will adjust. For adjustable-rate mortgages, your payment will decrease.
Working with a mortgage professional who understands monetary policy and stays up-to-date is crucial. I will advise you based on current and forecasted economic conditions, incorporating your financial goals and upcoming life changes into the best options for your unique situation.
The next Bank of Canada rate decision is October 23rd. To learn more about how this impacts your current or future mortgages, please reach out for a call.
