Canadian Key Interest Rates Remain Unchanged – But What Does That Mean To Consumers?

Last Updated on Monday, 11 June 2012 05:09 Written by Stefan Monday, 11 June 2012 03:47

All eyes were on Canada’s central bank today as both media outlets, real estate investors and ordinary home owners waited to hear what would happen to the benchmark interest rate. The result was a hold at the current rate of 1%. This marks the same interest rate level since September of 2010 and while it is great news for borrowers there is some hidden meaning here and it is not all good.

The interest rate that is set by the Bank of Canada is used by most of the major financial institutions in the country as a base for setting their own interest rates they charge to their customers. With the rate being held yet again it is now the longest period of time since the 1950’s that the central bank has not raised its key lending rate.

The main reason for this latest announcement from the Bank of Canada basically boils down to economic grow, or lack of it. While the economies of both Canada and the United States are showing signs of growth it has been quite modest. That would be fine except for the fact that growth in emerging market is slowing down at a rate that is higher then what the experts had initially predicted. Couple this with the economies of Europe which are at best struggling to remain buoyant and at worst teetering on total collapse and you can start to see why the Bank of Canada is thinking very carefully before raising the rates.

So What Does This Mean For Canada?

For anyone with a variable rate mortgage it means that their mortgage will remain low and unchanged for the time being. Since most variable rate terms are set for 3 months at a time it means that home owners carrying a mortgage can enjoy at least another 3 months of relatively low payments. For home buyers it means that they can still purchase a home at the currently low finance rates which could allow them to get more home for their dollar because they are able to afford the lower monthly payments that go along with it.

On the flip-side this is also likely to continue to push home prices upward since buying a home is made affordable by the low rates especially in the higher demand markets such as Toronto and Vancouver. This could offset most of the advantages buyers would normally receive from lower mortgages rates.

With the Bank of Canada keeping interest rates at 1% consumer debt could also be an issue. We have already seen that the amount of debt Canadian households are taking on is continuing to rise however it is not being matched by an increase in their incomes. This could be fine if things stay the same but it is expected that the central bank will start to raise the key lending rate in the near future in order to curb borrowing. When this happens many Canadian households saddled with debt may find it harder to repay. If too many people are unable to pay-down the money they borrowed we could see the Canadian economy begin to stall.

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