Bank rate cut again in January

The Bank of Canada cut its benchmark overnight lending rate to four per cent on January 22nd, and raised chances for further cuts in the near future. The trend-setting Bank rate, which is set 0.25 percentage points above the overnight lending rate, now stands at 4¼ per cent.

Fallout from the subprime lending meltdown in the U.S. caused the Bank to slash its forecast for economic growth and inflation. Assessing the Canadian economy, it said the domestic economy will remain strong but a high Canadian dollar will undercut exports and overall economic growth.

“The subprime lending meltdown is putting upward pressure on interest rates, so the Bank of Canada and the central banks of other nations will be leaning against the wind until the mess is sorted out,” said CREA Chief Economist Gregory Klump. “Since the meltdown will keep financial markets in turmoil for some time, the Bank all but said it would lower interest rates again in early March.”

When the Bank decided to lower interest rates on January 22nd, the advertised conventional five-year conventional mortgage rate stood at 7.49 per cent. This is 1.09 per cent above where it stood at the beginning of last year. Competition among mortgage lenders remains stiff, which continues to help many borrowers negotiate discounts from advertised rates. However, fallout from the sub-prime mortgage debacle in the U.S. has caused credit conditions to tighten in financial markets, which is resulting in smaller discounts off advertised mortgage interest rates.

Steady interest rates were factored into the CREA MLS® 2007 market forecast issued in November 2007. “Sales activity will stay strong and reach the second highest level on record this year. Prices are also forecast to continue rising. Additional cuts to mortgage interest rates is good news for housing affordability and Canadian housing demand,” Klump added. (CREA 22/01/2008)