Economic Update – November 2020: Interest Rates

2020-11-02 | 05:36:26

Last week, the Bank of Canada left its overnight benchmark rate unchanged at what it describes as its “lower bound” of ¼ percent. As a result, the Bank Prime Rate remains at 2.45%.

This decision was expected and is therefore not newsworthy. What is newsworthy is the Bank’s announcement that it will hold its policy interest rate at the lower bound until economic slack is absorbed. In its current projection, the Bank does not expect this to happen until into 2023.

Assuming inflation does not rise to 2% on a sustainable basis, this could mean several more years of low borrowing rates. This is great news for variable rate mortgage clients.

Here are some of the Bank’s revealing observations:

  • Through the summer, the rebound in employment and GDP in Canada was stronger than expected as the economy reopened
  • After rapid expansions, the Canadian and global economies have “given way to slower growth” as anticipated and “despite considerable remaining excess capacity”
  • Rising COVID-19 infections are likely to weigh on the economic outlook in many countries, and growth will continue to “rely heavily on policy support”
  • Considering the “likely long-lasting effects of the pandemic,” the Bank has revised down its estimate of Canada’s potential growth over its projection horizon
  • Global GDP is projected to contract by about 4 percent in 2020
  • The economic effects of the pandemic are “highly uneven across sectors” and this has been recognized by governments which have extended and modified business and income support programs
  • Oil prices remain about 30 percent below pre-pandemic levels while non-energy commodity prices, on average, have “more than fully recovered”
  • Measures of core inflation are all below 2 percent, consistent with an economy where “demand has fallen by more than supply.”

Looking Forward

During the news conference that accompanied the release of the Bank’s Monetary Policy Report, the Bank said its main message is that it will take “quite some time for the economy to fully recover from the COVID-19 pandemic, and the Bank of Canada will keep providing monetary stimulus to support the economy through the recovery.”

While the future is never possible to predict – not even by the Bank of Canada – the information given out by the Bank is one of a very clear direction – low interest rates are going to be required for the foreseeable future.

As always, please feel free to contact me if you have any questions about your mortgage, and if you have any friends, family, or co-workers looking for free advice please pass my contact information on to them. I am happy to help!

~ Patrick

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