Bank rate cut in December

The Bank of Canada lowered its benchmark overnight lending rate to 4.25 per cent on December 4th. The trend-setting Bank rate, which is set 0.25 percentage points above the overnight lending rate, now stands at 4.5 per cent.

The Bank acknowledged that the strong Canadian dollar has put inflation on a lower trajectory than previously forecast. It also said exports may be a bigger drag on Canadian economic growth due to a slowing U.S. economy and U.S. housing sector. Turmoil in global credit markets caused by the U.S. sub-prime meltdown was further identified as a risk to Canadian economic growth.

The Bank acknowledged that Canada’s domestic economy remains strong, but said downside risks to economic growth and a stronger Canadian dollar will push inflation lower. The Bank of Canada sets interest rates in order to contain inflation at between one and three per cent.

In line with its updated outlook, it said “the Bank judges that there has been a shift to the downside in the balance of risks around its October projection for inflation through 2009. In light of this shift, the Bank has decided to lower the target for the overnight rate.”

“Financial markets were split as to whether the Bank of Canada would hold rates steady or cut them by one quarter of a percent,” said CREA Chief Economist Gregory Klump. “If it didn’t cut interest rates in line with expectations, the Canadian dollar may have soared to new heights and caused even more damage to Canada’s exporting manufacturers. With more interest rate cuts on the way in the U.S., Canada may follow suit early next year,” he said. The next rate announcement is scheduled for January 22nd, 2008.

When the Bank decided to raise interest rates on December 4th, the advertised conventional five-year conventional mortgage rate stood at 7.39 per cent – down 0.05 per cent from the peak reached in October 2007. 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 has resulted in smaller discounts off advertised mortgage interest rates.

Steady interest rates were factored into the CREA MLS® 2007 market forecast issued in October. “Sales broke all previous records in the first ten months of 2007, which will push annual MLS® home sales activity to new heights this year and reach the second highest level on record next year. Prices are also forecast to continue rising next year. Additional cuts to mortgage interest rates is good news for Canadian housing demand,” Klump added. (CREA 04/12/2007)