On October 25, 2017, the Bank of Canada announced it was keeping its trend-setting overnight lending rate on hold at 1%. The rate rose by 0.25% in July and again in September. Since then, the Bank has cautioned that future interest rate increases depend on whether economic data suggest that inflation is starting to percolate.
The Bank also updated its economic forecast. On balance, it supports the prevailing sentiment among private sector economic forecasters and financial markets that the Bank will be cautious in its approach when raising interest rates further. Private sector forecasts currently suggest that interest rates will rise by 1/2% to 1% by the end of 2018.
The Bank’s updated forecast indicates that home sales activity and household spending are expected to “slow in light of policy changes affecting housing markets and higher interest rates.” It also remains wary about risks to the Canadian economic outlook posed by “trade policies, notably the renegotiation of the North American Free Trade Agreement” and recognizes that “because of high debt levels, household spending is likely more sensitive to interest rates than in the past.”
As of October 25, 2017, the benchmark five-year lending rate stood at 4.89%, which is the rate used to qualify mortgages with less than a 20% down payment. The benchmark five-year lending rate is 0.05 percentage points higher than when the Bank made its previous interest rate announcement on September 5th and up 0.25 percentage points versus one year ago.
Canada’s major chartered banks have recently raised their advertised five-year fixed mortgage interest rates, which now range between 3.04% and 4.89%. However, actual five-year fixed mortgage interest rates can be negotiated below advertised rates depending on mortgage applicants’ creditworthiness and the degree to which they do other banking business with the mortgage lender.
The next interest rate announcement will be on December 6, 2017. The Bank of Canada’s next Monetary Policy Report, which updates the Bank’s economic forecast, will be released on January 17, 2018.