Interest rate remains unchanged
By Elli Davis, July 27, 2009
Movement by Angel Arcones
Bank of Canada key overnight rate remains unchanged. Record low level 0.25% was reached this April, after series of interest rate drops all around the world. As everywhere, also real estate market in Toronto is influenced by the interest rate, which reflects in the affordability of mortgages. However, since mortgage is ongoing commitment for many years, we should not rely on the actual interest rate, but also possible future movements should be analyzed.
It's obvious the 0.25% rate can't be maintained forever. The question is, when it will start to grow again. BoC doesn't plan to raise it sooner than in 2nd quarter of 2010, but the reality will be based on the overall market health. Recent issue of Capital Points, prestigious financial newsletter, analyses the situation and finds several important factors, indicating improved conditions of Canadian financial sector.
The most important factor is dramatic improvement of funding conditions across the financial system. While liquidity was the question of day in autumn, worries about sufficient cash are not so intense now. Deposits continue to grow (drop from recent weeks was caused by foreign currency valuation effects) and credit growth almost stopped. Simultaneously, while need for liquidity is lower, funding opportunities are better – especially record high interbank spreads from the turn of the year 2008 are gone.
This signalizes improved market conditions, but does it mean BoC should raise interest rate? Not at all. Better environment from recent weeks may cause some of the anti crisis programs and rules (like liquidity measures) to be changed. It also means we will definitely not see quantitative easing actions (like in the UK or USA) in Canada. But we shouldn't misunderstand these circumstances.
But there are still two serious reasons why not to raise interest rate so soon – it's deflation (we reached -0.3% , first negative value in this century) and appreciating Canadian dollar, which threatens our exporters. It means very favorable mortgages will be available for some year more. This will fuel Toronto real estate market growth, which is quickly erasing losses of the last year's drop.