Bank of Canada Rate Announcement Oct 28th, 2020
Diane Buchanan • October 28, 2020
The Bank of Canada today maintained its target for the overnight rate at the effective lower bound of ¼ percent, with the Bank Rate at ½ percent and the deposit rate at ¼ percent. The Bank is maintaining its extraordinary forward guidance, reinforced and supplemented by its quantitative easing (QE) program. The Bank is recalibrating the QE program to shift purchases towards longer-term bonds, which have more direct influence on the borrowing rates that are most important for households and businesses. At the same time, total purchases will be gradually reduced to at least $4 billion a week. The Governing Council judges that, with these combined adjustments, the QE program is providing at least as much monetary stimulus as before.
The global and Canadian economic outlooks have evolved largely as anticipated in the July Monetary Policy Report (MPR), with rapid expansions as economies reopened giving way to slower growth, despite considerable remaining excess capacity. Looking ahead, rising COVID-19 infections are likely to weigh on the economic outlook in many countries, and growth will continue to rely heavily on policy support.
In the United States, GDP growth rebounded strongly but appears to be slowing considerably. China’s economic output is back to pre-pandemic levels and its recovery continues to broaden. Emerging-market economies have been hit harder, especially those with severe outbreaks. The recovery in Europe is slowing amid mounting lockdowns. Overall, global GDP is projected to contract by about 4 percent in 2020 before growing by just over 4 ½ percent, on average, in 2021–22.
Oil prices remain about 30 percent below pre-pandemic levels. Meanwhile, non-energy commodity prices, on average, have more than fully recovered. Despite continued low oil prices, the Canadian dollar has appreciated since July, largely reflecting a broad-based depreciation of the US dollar.
In Canada, the rebound in employment and GDP was stronger than expected as the economy reopened through the summer. The economy is now transitioning to a more moderate recuperation phase. In the fourth quarter, growth is expected to slow markedly, due in part to rising COVID-19 case numbers. The economic effects of the pandemic are highly uneven across sectors and are particularly affecting low-income workers. Recognizing these challenges, governments have extended and modified business and income support programs.
After a decline of about 5 ½ percent in 2020, the Bank expects Canada’s economy to grow by almost 4 percent on average in 2021 and 2022. Growth will likely be choppy as domestic demand is influenced by the evolution of the virus and its impact on consumer and business confidence. Considering the likely long-lasting effects of the pandemic, the Bank has revised down its estimate of Canada’s potential growth over the projection horizon.
CPI inflation was at 0.5 percent in September and is expected to stay below the Bank’s target band of 1 to 3 percent until early 2021, largely due to low energy prices. Measures of core inflation are all below 2 percent, consistent with an economy where demand has fallen by more than supply. Inflation is expected to remain below target throughout the projection horizon.
As the economy recuperates, it will continue to require extraordinary monetary policy support. The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In our current projection, this does not happen until into 2023. The Bank is continuing its QE program and recalibrating it as described above. The program will continue until the recovery is well underway. We are committed to providing the monetary policy stimulus needed to support the recovery and achieve the inflation objective.
The next scheduled date for announcing the overnight rate target is December 9, 2020. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on January 20, 2021.
You’ve most likely heard that there are two certainties in life; death and taxes. Well, as it relates to your mortgage, the single certainty is that you will pay back what you borrow, plus interest. With that said, the frequency of how often you make payments to the lender is somewhat up to you! The following looks at the different types of payment frequencies and how they impact your mortgage. Here are the six payment frequency types Monthly payments – 12 payments per year Semi-Monthly payments – 24 payments per year Bi-weekly payments – 26 payments per year Weekly payments – 52 payments per year Accelerated bi-weekly payments – 26 payments per year Accelerated weekly payments – 52 payments per year Options one through four are straightforward and designed to match your payment frequency with your employer. So if you get paid monthly, it makes sense to arrange your mortgage payments to come out a few days after payday. If you get paid every second Friday, it might make sense to have your mortgage payments match your payday. However, options five and six have that word accelerated before the payment frequency. Accelerated bi-weekly and accelerated weekly payments accelerate how fast you pay down your mortgage. Choosing the accelerated option allows you to lower your overall cost of borrowing on autopilot. Here’s how it works. With the accelerated bi-weekly payment frequency, you make 26 payments in the year. Instead of dividing the total annual payment by 26 payments, you divide the total yearly payment by 24 payments as if you set the payments as semi-monthly. Then you make 26 payments on the bi-weekly frequency at the higher amount. So let’s use a $1000 payment as the example: Monthly payments formula: $1000/1 with 12 payments per year. A payment of $1000 is made once per month for a total of $12,000 paid per year. Semi-monthly formula: $1000/2 with 24 payments per year. A payment of $500 is paid twice per month for a total of $12,000 paid per year. Bi-weekly formula: $1000 x 12 / 26 with 26 payments per year. A payment of $461.54 is made every second week for a total of $12,000 paid per year. Accelerated bi-weekly formula: $1000/2 with 26 payments per year. A payment of $500 is made every second week for a total of $13,000 paid per year. You see, by making the accelerated bi-weekly payments, it’s like you end up making two extra payments each year. By making a higher payment amount, you reduce your mortgage principal, which saves interest on the entire life of your mortgage. The payments for accelerated weekly payments work the same way. It’s just that you’d be making 52 payments a year instead of 26. By choosing an accelerated option for your payment frequency, you lower the overall cost of borrowing by making small extra payments as part of your regular payment schedule. Now, exactly how much you’ll save over the life of your mortgage is hard to nail down. Calculations are hard to do because of the many variables; mortgages come with different amortization periods and terms with varying interest rates along the way. However, an accelerated bi-weekly payment schedule could reduce your amortization by up to three years if maintained throughout the life of your mortgage. If you’d like to look at some of the numbers as they relate to you and your mortgage, please don’t hesitate to connect anytime; it would be a pleasure to work with you.
Thinking of Buying a Home? Here’s Why Getting Pre-Approved Is Key If you’re ready to buy a home but aren’t sure where to begin, the answer is simple: start with a pre-approval. It’s one of the most important first steps in your home-buying journey—and here's why. Why a Pre-Approval is Crucial Imagine walking into a restaurant, hungry and excited to order, but unsure if your credit card will cover the bill. It’s the same situation with buying a home. You can browse listings online all day, but until you know how much you can afford, you’re just window shopping. Getting pre-approved for a mortgage is like finding out the price range you can comfortably shop within before you start looking at homes with a real estate agent. It sets you up for success and saves you from wasting time on properties that might be out of reach. What Exactly is a Pre-Approval? A pre-approval isn’t a guarantee. It’s not a promise that a lender will give you a mortgage no matter what happens with your finances. It’s more like a preview of your financial health, giving you a clear idea of how much you can borrow, based on the information you provide at the time. Think of it as a roadmap. After going through the pre-approval process, you’ll have a much clearer picture of what you can afford and what you need to do to make the final approval process smoother. What Happens During the Pre-Approval Process? When you apply for a pre-approval, lenders will look at a few key areas: Your income Your credit history Your assets and liabilities The property you’re interested in This comprehensive review will uncover any potential hurdles that could prevent you from securing financing later on. The earlier you identify these challenges, the better. Potential Issues a Pre-Approval Can Reveal Even if you feel confident that your finances are in good shape, a pre-approval might uncover issues you didn’t expect: Recent job changes or probation periods An income that’s heavily commission-based or reliant on extra shifts Errors or collections on your credit report Lack of a well-established credit history Insufficient funds saved for a down payment Existing debt reducing your qualification amount Any other financial blind spots you might not be aware of By addressing these issues early, you give yourself the best chance of securing the mortgage you need. A pre-approval makes sure there are no surprises along the way. Pre-Approval vs. Pre-Qualification: What’s the Difference? It’s important to understand that a pre-approval is more than just a quick online estimate. Unlike pre-qualification—which can sometimes be based on limited information and calculations—a pre-approval involves a thorough review of your finances. This includes looking at your credit report, providing detailed documents, and having a conversation with a mortgage professional about your options. Why Get Pre-Approved Now? The best time to secure a pre-approval is as soon as possible. The process is free and carries no risk—it just gives you a clear path forward. It’s never too early to start, and by doing so, you’ll be in a much stronger position when you're ready to make an offer on your dream home. Let’s Make Your Home Buying Journey Smooth A well-planned mortgage process can make all the difference in securing your home. If you’re ready to get pre-approved or just want to chat about your options, I’d love to help. Let’s make your home-buying experience a smooth and successful one!
