Central Bank Rate Hike Not Enough to Worry Mortgage Holders

The Bank of Canada raised its target overnight rate by a quarter of a percentage point to 0.5 percent today, making it the first of the G7 countries to do so. The Bank Rate rose correspondingly to 0.75 percent, with the deposit rate kept at 0.25 percent

Housing and consumer spending in Canada fed a robust 6.1 percent growth in the economy in the first quarter of this year. However, in a media statement released today, the Bank of Canada cited continuing global market instability as a reason for remaining cautious on interest rate increases:

This decision still leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in light of the significant excess supply in Canada, the strength of domestic spending, and the uneven global recovery.

Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.

Canadian banks followed today's announcement by hiking prime rates. Reaction has been tame, considering that interest rates in Canada remain at historic lows and the move was anticipated for months. A Canadian Business article reports that variable rate mortgage holders remain largely unfazed by the rate increase, believing that they still stand to save by following the rate gradually upward – rather than locking in at a higher fixed rate, for now.

CTV News coverage of the rate increase is more ominous, quoting a Business News Network spokesperson as saying that this is the “Nail in the coffin” for historically low interest rates. Maybe so, but as long as Canadians taking out variable rate mortgages today can control their personal debt loads, they should be able to withstand small increases in their mortgage payments.

As always, opting for a fixed mortgage rate is recommended for buyers who prefer to play it safe and not polish the crystal ball. The Bank of Canada scheduled the next announcement of its overnight rate target for July 20, 2010.

Pin It