BoC holds rate; mortgage rates should go down

The Bank of Canada building is seen in Ottawa, Wednesday, April 15, 2020. Adrian Wyld / THE CANADIAN PRESS

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As expected, The Bank of Canada (BoC) held its overnight target rate on June 3.

“The Bank of Canada maintained its target rate at the effective lower bound of 0.25 percent,” said the BoC statement. “Incoming data confirms the severe impact of the COVID-19 pandemic on the global economy. This impact appears to have peaked, although uncertainty about how the recovery will unfold remains high.”

The current rate will have a long shelf life, says Justin Thouin, co-founder and CEO of

“There is virtually no chance the Bank of Canada can increase its benchmark interest rate in the foreseeable future,” says Thouin. “I don’t have a crystal ball, but I would be surprised if that rate didn’t rise for at least two years. We are starting to see the large Canadian banks report major losses and raising its key rate would further stress the banking system and that is something the BoC wishes to avoid at all costs. That is the primary reason that the BoC is holding the rate.”

James Laird, co-founder of and president of CanWise Financial mortgage brokerage, agrees.

“BoC’s announcement indicated that they believed the impact of COVID-19 has peaked in the current quarter. However, the economic recovery is still to follow,” says Laird. “BoC seems committed to maintaining the target for the overnight rate at its current level and continuing its current asset purchase program until the economy has recovered.”

BoC has history and experience to fall back on. After the 2008-2009 economic crisis ended, it increased its benchmark rate twice in 2010 and, quickly realizing that was too soon, made no increases until 2015, says Thouin, adding 0.25 percent is as low as BoC is likely to go.

“There are many places in the world with negative interest rates and Canada will likely take its cues from the U.S. But negative interest rates are viewed by the BoC as a desperate measure and so, at this point, I don’t foresee that happening,” he says. “Even with Canada’s unemployment rate going higher than at any time since the Great Depression, negative interest rates are not likely in the BoC’s plans.”

Professor of economics at Concordia University, Moshe Lander, and professor Angelo Melino from the University of Toronto, member of the economic panel, believe the rate should decrease without going negative, each suggesting a decrease to 0.15 percent, with Melino suggesting the bank could also try a 25-basis point cut to zero percent.

“The Bank is worried about pushing below its effective lower bound,” says Lander. “I think it should be unconventional in these unconventional times and try a 10 basis points decrease and see what happens. It can move incrementally until it really does reach the lower bound.”

Just less than half of the panelists say the rate will hold for more than a year, with 40 percent thinking there won’t be a rate move until 2022. Only 13.33 percent believe there will be any movement within the next 12 months.

Out of all the bad news surrounding the virus, the rate hold is a bright light for consumers.

“This is good news for mortgage rates, especially variable rates,” says Thouin. “While the prime lending rate will stay the same, variable rates will likely go down. Historically, we have seen variable rates at prime minus one or even lower, whereas currently they sit at prime minus 0.5 or so. With increased competition within lenders for a shrinking market (fewer home sales), as well as some of the lending risk aversion we saw from the banks due to COVID-19 going away, I project variable rates to move lower. I also think fixed-rate mortgages will go down. The five-year Canada bond yield is almost at an all-time low. Fixed mortgage rates are based indirectly on Government of Canada bond yields. Typically, banks have added one to 1.5 points to the Canada bond to come up with five-year fixed rates, whereas currently this is closer to a two percent spread.”

For those considering a mortgage or with a renewal coming up, Thouin says variable is the way to go.

“Over the past 20 years, borrowers have almost always paid less interest by choosing a variable-rate mortgage,” he says. “Variable mortgage rates are currently lower than fixed-rate mortgages and I expect this to continue, even as they both go down. But if having cost certainty is important to you, then a fixed-rate mortgage is not a bad decision, as interest rates are near historic lows and going to stay at these levels for some time.”

Going forward, BoC’s main concern is ensuring the financial system in Canada continues to operate effectively, says Thouin.

“If it were to falter, the fallout would be catastrophic. From a consumer standpoint, there is no way the BoC can increase its benchmark interest rate,” he says. ”There will be a wave of bankruptcies coming and about 15 percent of Canadians have set up deferrals on their mortgages, increasing their debt load in the future. Canadians were already laden with too much debt and now the situation is even more dire. The majority of people cannot handle more interest payments, as evidenced by the six to eight million people either unemployed or claiming CERB.”