Hike anyone?

I’m referring to the interest rate type, not the go-for-a-walk-in-the-country type.

Graph representing growth, rising trend with finger pointing up

Tuesday is the next scheduled key interest rate announcement for the Bank of Canada. The Bank of Canada carries out monetary policy by effecting short-term interest rates in Canada. This is achieved by lower or raising the ‘target for the overnight rate.’

The rate at which the major banks and financial institutions borrow or lend one-day (hence ‘overnight’) money amongst themselves is referred to as the overnight rate. The Bank of Canada has a target set for that rate. The target is also referred to as the Bank’s key interest rate or the key policy rate.

But, why should this matter to you?   Well, changes in the target for the overnight rate influence other interest rates, like consumer loan or mortgage rates.

Since November 2000, the Bank has been using a system of 8 fixed dates each year on which they announce whether it will change the key policy rate.  Interestingly, the Bank had not changed it’s key rate of 0.25% since April 21, 2009, until the last scheduled date of June 1st, 2010 when the rate changed to 0.50%.

Scotia Bank Group’s Global Forecast Update of July 7th says, ” Central banks in the higher-growth and more inflation-prone emerging countries, such as India and Brazil, will continue to normalize their ultra-low short-term borrowing costs on a more frequent basis.   Among the advanced economies with moderate growth and low inflation, Australia and Canada for example, the process of adjustment has begun, though the pace of prospective rate increases will be tied to economic and financial developments in both domestic and foreign markets. In contrast, central banks in the other key advanced nations are expected to keep their bellwether overnight rates at current levels for an extended period, reflecting the pressures on economic activity due to increasing fiscal restraint in the United Kingdom and the euro zone, lacklustre growth in Japan, and decelerating inflation trends in the United States. ”

CanadianMortgageTrends.com had this to say July 15th about the forecast for mortgage rates:  “Economic worries have led major economists to slash their long-term interest rate predictions. The big banks’ average forecasts for Canada’s overnight rate and 5-year bond have plunged 60 and 57 basis points respectively.”

What do I think?  Real estate is a good investment and while I don’t predict a significant change to the target rate on Tuesday, mortgage rates are still at low levels even if there is a small upward shift.   If you’re thinking of a move, it’s a great time to do it while the real estate market is somewhat balanced and mortgage rates are affordable.