3 Key Ways How Bank of Canada Interest Rate Cut Impacts Consumers
With the economy suffering from the effects of the drop in oil prices, the Bank of Canada dropped its key interest rate by 0.25% – something that was a surprise to many. Economists didn’t expect to see a change in interest rates until the latter part of 2015 or early 2016, and it caught many people off guard. It was expected that the interest rate would stay put.
“It’s the first time the central bank has moved the overnight rate since September 2010—a move the bank calls ‘insurance’ against the potentially destructive effects of the global oil price collapse. Canada is largely impacted by recent drops in barrel prices as we are an oil-dependent economy,” says Romana King on MoneySense.ca.
The sudden move has many consumers wondering how the drop in interest rates could impact their personal finances, and with good reason.
1. Cheaper mortgage rates for some homeowners
The drop in interest rates is good news for homeowners with variable mortgage rates. Since rates are determined by the prime interest rate, a drop in rates from the Bank of Canada should signal a drop in interest rates from the banks. How much has yet to be determined, but it is welcome news for many homeowners.
However, fixed rate mortgages may also see a slight decline, but homeowners will not be able to capitalize on the decreased rates until renewal time.
“Holders of fixed-rate mortgages, of course, won't enjoy an immediate cut in monthly payments. Canadians taking out a new fixed-rate mortgage or renewing their old one right now could see rates edge down. Fixed mortgage rates are linked to long-term government bond yields. Those bond yields have already begun to fall in light of the Bank of Canada's interest rate cut,” as discussed on CBCNews.ca.
2. Increased housing prices
A drop in mortgage rates will undoubtedly make buying a home more attractive, especially in high cost areas across the GTA.
“Decreased mortgage rates are likely to boost sales and prices of homes in Central Canada, including in Toronto’s red-hot property market, where Soper (President of Royal LePage) predicts prices could climb by 4.5 to five per cent this year,” as outlined on macleans.ca.
3. Interest earned on investments
One area the lower rate could hurt Canadians is the ROI on their investments, especially older Canadians who are using interest from investments to supplement their income. “Older Canadians who rely on interest-bearing investments for their income could find themselves squeezed as a result of the central bank’s policy change,” says Avery Shenfeld, Chief Economist at CIBC World Markets, in macleans.ca.
“It will push them into looking at alternative investments that can generate a bit more yield than a straight GIC,” he adds.
Other types of investments are also likely to be impacted as well. "There's not going to be a massive change, but at the same time … if you're not earning much interest before, you're going to be earning less interest now," Randall Bartlett, Senior Economist at TD Economics, tells CBCNews.ca. “This could be a good time for savers to think about changing their strategy,” Bartlett adds.
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