For the majority of 2020, it appeared that the Bank of Canada was going to maintain their overnight rate through 2023.  No increases or decreases. Circumstances can and do change however, and it’s likely that we will see them move from this position in the first quarter of 2021.

 

Our Economic Situation Is Getting Worse
In December we saw a whopping 63,000 jobs lost, which represented the first increase in unemployment since April. The 63,000 is referring to an economic job loss, meaning it takes into consideration new employment as well. There were 36,500 new jobs added with a total of 99,000 jobs lost. The majority of these jobs were lost within the restaurant and hotel industry. They were almost entirely part-time jobs from those under the age of 24. This doesn’t mean that it doesn’t have any economic impact however.  Of the 99,000 jobs lost, just over half were in the city of Toronto, which makes sense considering the city has been locked down for most of December.

 

The Canadian Dollar And Its Impact On the BOC Rate
The Canada Dollar continues to gain strength over the US dollar, and the gap between the two currencies has been shrinking since April. This is bad news for Canadian exports as the US is Canada’s largest trading partner. As the Canadian dollar narrows the gap, Canada becomes a less attractive trading partner to the US, which can have a significant impact on our economy.  A rate cut from the BOC would help them to maintain a healthy margin between the Canadian and US currency, which is one of the key reasons why we may see a downward move.

 

Today’s Prime Rate
The Bank of Canada overnight rate is currently at 0.25%.  As rate movement is usually in 0.25% increments, another rate cut would bring them down to 0%.  The BOC will do anything they can to avoid this, so I would not expect them to drop by the full 0.25%.  If they come, then I would expect it to only be 0.10% or 0.15% at best.

The BOC overnight rate is what lenders use to set their prime rates. The prime rate is currently 2.45%. A further cut by the BOC would mean that banks would also drop their prime rates.  They aren’t obligated to however. In 2015, the BOC made two 0.25% rate cuts in the first half of the year, the banks only dropped by 0.15% both times. To the best of my knowledge, these were the only two times in history where this has happened.  Could it happen again? Anything is possible, but the likely scenario is that the banks will match the cut.  Monoline mortgage lenders and credit unions will then follow the banks lead.

 

Could the Bank Of Canada Drop Rates Even Further?
There is no evidence to support further rate cuts by the BOC, however this can change.  If second rate cut is required, then they would have no choice but to bring the rate down to zero.  Some countries have already gone to negative interest rates. Could this happen in Canada?  Very unlikely, but then again, anything is possible.  Either way, mortgage rates are expected to remain low for all of 2021.

 

When Will The Bank of Canada Increase Rates?
They’ve been pretty firm on the idea holding off on rate increases until 2023, although there are some economists who have been predicting that we could see an upward movement by the end of 2022. I doubt this will happen, but anything is possible. Given that our economy will continue to get worse before it gets better, I wouldn’t be surprised if the rate remained at current, or lower levels beyond 2023. Once the pandemic has ended, we can expect our economy to flourish, at which point will start to see rates climb back up. The question is… when will that be?  It’s not going to be overnight. With COVID-19 numbers rapidly rising, along with the new stay at home order announced by Ontario Premiere Doug Ford, further economic decline can be expected. Given how far the economy has sunk, it’s probably going to take ten years to dig ourselves out of this mess. This doesn’t mean that they will hold the rate for 10 years, nor does it mean that we’ll be seeing historically low mortgage rates for ten years, but I wouldn’t expect to see any significant increases to mortgage rates anytime soon. Eventually, they will increase rates, but I would not expect anything significant over the next 2-3 years at least. Anything can happen, and time will tell.

 

The next scheduled rate announcement from the Bank of Canada is Wednesday, January 20th.