Bank of Canada cuts interest rates in response to rising global economic risks

In line with financial market expectations, the Bank of Canada announced, on March 4, it was lowering its trend-setting overnight lending rate by 50 basis points from 1.75% to 1.25%. This was the first change in the overnight lending rate since October 2018.

This follows a day after the U.S. Federal Reserve cut the Federal Funds rate by 50 basis points in an emergency session—part of a coordinated effort by global monetary and fiscal authorities to provide support to the global economy.

The reason for the move was largely due to increasing risks of major supply chain disruptions resulting from the COVID-19 virus. According to the announcement, COVID-19, and efforts to contain the virus, are likely to cause business activity to decline. The virus has already caused a decline in global commodity prices, consequently lowering the value of Canadian exports which has knock-on effects for the rest of the economy.

In addition to the global risks associated with COVID-19, the Bank also cited several domestic factors holding back the economy, including rail line blockades, the Ontario teachers strikes, and winter storms.

The combination of these factors has caused the Bank’s outlook for the Canadian economy to deteriorate compared with their outlook in the January Monetary Policy Report.

As these risks evolve, the Bank has stated it “stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target.”

This decline in interest rates, along with recent policy changes announced by the Department of Finance, represents an easing of financial conditions for the housing market. However, this could be counter-balanced by the potential for lower income growth and disruptions to economic activity.

On March 4, the benchmark five-year lending rate was still 5.19%, where it has remained since being trimmed in July 2019 by a quarter of a percentage point. 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 3.2%. Homebuyers 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 Bank of Canada’s next interest rate announcement will be on April 15, 2020 and will be accompanied by an update to the Bank of Canada’s Monetary Policy Report giving a more detailed outlook for the Canadian economy.

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