Kingston and Area Real Estate Association

Bank of Canada maintains overnight lending rate at effective lower bound of ¼ per cent

In a scheduled announcement on June 3rd, 2020 the Bank of Canada maintained its overnight lending rate at 0.25%, which the Bank considers its effective lower bound. The Bank also noted that incoming data shows the most severe impacts of COVID-19 on the global economy seem to have already peaked but there is still much uncertainty about how the recovery will progress.

Although the Bank stated the pandemic has led to historic losses in output and jobs in Canada, they note that the Canadian economy appears to have avoided the most severe scenario presented in the Bank’s April Monetary Policy Report. The level of real GDP in the first quarter of 2020 was 2.1% lower than in the fourth quarter of 2019, reflecting both falling oil prices and widespread shutdowns nationwide. The Bank also stated that “the level of real GDP in the second quarter will likely show a further decline of 10-20%, as continued shutdowns and sharply lower investment in the energy sector take a further toll on output” and that “decisive and targeted fiscal actions, combined with lower interest rates, are buffering the impact of the shutdown on disposable income and helping to lay the foundation for economic recovery.”

While there are still unprecedented levels of uncertainty going into the second half of 2020 and beyond, the Bank is expecting the economy to resume growth in the third quarter. The consensus among market analysts is that the target for the overnight rate will remain at its effective lower bound throughout 2020 and into 2021 as long-term asset purchases and other programs are used to maintain and improve financial market functioning.

The Bank stated that after significant strain in March as the pandemic was starting to unfold, short-term funding conditions have improved. This is allowing the Bank to reduce the frequency of its term repo operations to once per week, and its program to purchase bankers’ acceptances to bi-weekly. The Bank states that it “stands ready to adjust these programs if market conditions warrant.” Other programs to purchase federal, provincial, and corporate debt are continuing at their present frequency and scope.

As of June 3rd, the benchmark five-year lending rate was 4.94%, down from 5.04% in April. All mortgage applicants must qualify for financing based on an interest rate no less than the benchmark five-year lending rate, even if the mortgage is for less than five years.

Canada's major chartered banks are currently advertising five-year fixed mortgage interest rates of around 2.49%. Home buyers can often negotiate the interest rate for mortgage financing based on their creditworthiness and the degree to which they do other banking business with the mortgage lender.

Tiff Macklem takes over as the Bank’s tenth Governor today. The Bank noted that he participated as an observer in Governing Council’s deliberations for this policy interest rate decision and endorses the rate decision and measures announced in their press release. The Bank of Canada’s next scheduled interest rate announcement will be on July 15th, 2020 and the next full update of the Bank’s outlook on the economy and inflation will be published in their Monetary Policy Report on the same day.