The Pros and cons of the Bank of Canada’s interest rate cut.

In slashing its key interest rate to 0.5%, the Bank of Canada is aiming to boost both consumer spending and business investment by providing cheaper access to capital. But the rate cut could also pose some risks to the country’s economy.

MORTGAGE DEBT: Variable-rate mortgage holders could get some relief as Canada’s big banks move their prime rates lower. TD Bank (TSX:TD) was the first out of the gate to announce a reduction in its prime rate — which is used to determine variable-rate mortgages, home equity lines of credit and other kinds of variable-rate borrowing. But the lender only passed on 10 basis points of savings to borrowers, rather than the full 25 basis point cut.

Other financial institutions have followed with Scotiabank, CMLS and MCAP’s Prime Rates now down to 2.70% from 2.85%.

Reduced mortgage rates could cause house prices to soar higher in red-hot markets like Toronto and Vancouver, says Phil Soper, CEO of Royal LePage. That could leave some Canadians struggling to service their debts once interest rates begin to rise.

But Soper says the second consecutive rate cut could also reduce consumer confidence and temper home sales to some extent, thus reducing the impact on consumer borrowing.

Original Article from: www.macleans.ca/economy/economicanalysis

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