Overnight rate unchanged, time to refinance?

As predicted by the industry experts, the Bank of Canada kept its overnight rate at 1.75% last week. Many homeowners are now wondering if it is perhaps the right time for refinancing.

While refinancing a mortgage to pay down debt means you will owe more on your mortgage, it will free up some cash for you.

The overnight rate is the interest rate at which major financial institutions borrow and lend one-day (or ‘overnight’) funds among themselves, the Bank sets a target level for that rate. This target for the overnight rate is often referred to as the Banks’ policy interest rate.

The Bank rate is correspondingly 2% and the deposit rate is 1.5%. The BoC has maintained the current overnight rate since last October, when it was raised from 1.5%. Changes in the target for the overnight rate influence other interest rates at the big banks and in turn the rates Canadians pay for variable-rate mortgages and other floating-rate loans. They can also affect the exchange rate of the Canadian dollar.

This lack of movement makes Canada somewhat of a holdout among other central banks around the world, that are dropping rates to help their local economies in an uncertain global economic climate.

“There is growing evidence that the global economy is stabilizing, with growth still expected to edge higher over the next couple of years. Financial markets have been supported by central bank actions and waning recession concerns, while being buffeted by news on the trade front.

Growth in Canada slowed as expected in the third quarter of 2019 to 1.3%, and stronger wage growth led consumer spending to a moderate expansion. Housing investment was also a source of strength, supported by population growth and low mortgage rates. Consumer spending and housing activity are important sources of resilience in the Canadian economy, and the BoC indicated that it would continue to be on alert for any financial vulnerabilities that may affect the household sector.

The central bank is clearly in no rush to adjust its benchmark interest rate. There are currently two other factors that will tend to keep the Bank on the sidelines, potentially until the middle of 2020.

The new Liberal government in Ottawa will likely need to deliver a new budget probably in the first quarter and Governor Stephen Poloz has announced that he will not seek another term and will step down in June. He has often expressed his concern about consumer debt and worries about an overheated housing market as key reasons for holding the line on interest rates. It is unlikely that this will change in his last 6 months on the job.

The Bank of Canada’s next interest rate decision is set for January 22, 2020 when it will also update its outlook for the economy and inflation as part of it quarterly monetary policy report.

Out Mortgage brokers have combined mortgage industry knowledge of over 26 years. Click here if you would like one of our brokers to see if refinancing would be a good option for you.

Original article: www.mortgagebrokernews.ca