Bank of Canada maintains overnight lending rate at 0.25% and expands asset purchases

In a scheduled announcement on April 15, 2020, the Bank of Canada maintained its overnight lending rate at 0.25%, which the Bank considers its effective lower bound. In order to further stimulate the economy and improve the functioning of financial markets the Bank has announced a series of other asset purchase programs.

Although the Bank stated the “outlook is too uncertain at this point to provide a complete forecast,” their analysis suggests the real GDP declined between 1-3% in the first quarter of 2020 and will be 15-30% lower in the second quarter compared to the fourth quarter of 2019. Inflation is also expected to hold close to 0% in the second quarter of 2020 due largely to lower gas prices.

The Bank of Canada has decreased the target for the overnight rate by a combined 1.5% since the beginning of March. This has allowed the prime lending rate to fall for corporations and well qualified buyers. Mortgage rates have been slower to respond as financial institutions perceive increased uncertainty associated with lending in this environment.

The Bank has also announced a series of purchase programs aimed at different financial assets, including federal government bonds, mortgage bonds, and most recently, up to $60 billion in provincial and corporate bonds.

“These measures will work in combination to ease pressure on Canadian borrowers,” Governor Stephen Poloz said in a statement. “As containment restrictions are eased and economic activity resumes, fiscal and monetary policy actions will help underpin confidence and stimulate spending by consumers and businesses to restore growth.”

Mortgage bonds are an important way that financial institutions raise money to finance their mortgage lending. In order to support that lending the Bank of Canada is purchasing these types of bonds ensuring that financial institutions can continue to finance their mortgage lending to Canadian homeowners.

 As of April 15, the benchmark five-year lending rate was 5.04%, down from 5.19% in early March. 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 3.24%. 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.

The Government and Bank of Canada will continue to announce updated stimulus measures over the coming weeks as the economic impacts of these changes unfold.

The Bank of Canada’s next scheduled interest rate announcement will be on June 3, 2020 and the next full update of the Bank’s outlook on the economy will be on July 15, 2020.

CREA complies and analyzes numerous factors affecting the real estate market for the public, REALTORS® and governments.

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