Shock Bank of Canada Rate Cut: What It Means for Borrowers

By: Thomas Sigsworth on January 21, 2015

The Bank of Canada stunned markets today with a surprise quarter point rate cut, lowering the benchmark interest rate from 1% to .75%. And yes, it really was a surprise: of the 22 economists surveyed by Bloomberg News prior to the announcement, fully zero predicted the Bank would take rates lower.

 
In a statement to the press, the BoC indicated it is concerned about the impact of falling oil prices on the Canadian economy, and on inflation.
 
Last year at this time we stated that falling inflation meant that it was only a matter of time until the Bank of Canada cut rates – the rate cut took longer than expected, but here it is. This is a central bank that remains very concerned with downside risks to the economy, and today they replaced talk with action.
 
Of course, the BoC’s move has big implications for Canadian borrowers – mortgage rates have fallen throughout the day, and many of our broker partners have already cut their variable and fixed rate offerings significantly. In just the last few hours, 5-year variable rate mortgages on our site have dropped from roughly 2.10% to as low as 1.84%!
 
The rate cut will result in significant savings for homeowners with variable rate mortgages – on a $500,000 loan, your interest savings will be roughly $1250 per year, or over $100 per month.
 
Fixed rates also look set to take a dive – bond yields fell today across the entire interest rate complex with 5-year Government of Canada yields in particular taking it on the chin. It’s no surprise that right now on our site you can get 5-year fixed rates from just 2.58%.
 
What's more, rock-bottom fixed rates look set to continue for some time given comments today from Bank of Canada governor Stephen Poloz.
 
Speaking to reporters, Poloz characterized the surprise rate cut as an “insurance policy” against the shock of falling oil prices, and he hinted that the Bank was prepared to cut rates again in subsequent meetings, saying “the world changes fast and if it changes again, we have room to take out more insurance.”
 
This is a governor who is clearly mulling additional rate cuts in the months ahead if economic growth slows further and inflation falls below the Bank’s control range of 1-3%.

Given today’s interest rate announcement, borrowers should expect interest rates to stay “lower for longer”, and they should also give variable rate mortgages a fresh look if they haven’t already done so. Stephen Poloz made it clear today that low rates will be sticking around in Canada for a long, long time. 

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