The Bank of Canada Rate Announcement: What You Should Know

By RateSupermarket.ca

This past Wednesday, headlines touted the latest update on interest rates from the Bank of Canada; the Overnight Interest Rate remains static they stated, in addition to warnings that Canadians should buckle down in the face of slower-than expected economic growth. It all sounds very dire - but how do these national interest rates affect the everyday Canadian consumer? Here's a crash course on understanding a Bank of Canada Rate Announcement.

What Does the Bank of Canada Do?
The Bank of Canada has been around since 1934 and was established to govern Canada's all-around financial management, including our currency and Monetary Policy. Based in Ottawa and currently headed by Governor Mark Carney, the mandate of the Bank is to "promote the economic and financial welfare in Canada".

The Monetary Policy maintains the amount of money and its worth within Canada, in addition to keeping inflation levels where they should be. In order to control the Monetary Policy and keep our economy in good standing the BoC can manipulate interest rates and the cost of borrowing for mortgages and loans - a measure they report on eight times a year with the Rate Announcements.

How Does the BoC Control Interest Rates?
The BoC sets what is known as the Overnight Lending Rate, also referred to as the Key Interest Rate or Key Policy Rate. This determines the cost of borrowing for banks taking out one day funds with each other - something that occurs on a daily basis. It might be a surprise to some account holders, but Canadian banks swap money constantly to meet their short term lending needs. The Banks also set their Prime Rate, which is their most competitive and preferred rate for borrowers, based on the Overnight Lending Rate. This means if you're taking out a loan or mortgage when the BoC rate is high, your bank is likely charging you more interest as a result - a reason why variable mortgage holders should keep a keen eye on these rates.

Why The Cost of Borrowing is at a Record Low
On the flip side, a low BoC rate means borrowing from your bank is relatively cheap, and you're getting a great interest break on that loan or mortgage - conditions that are at play right now. In Wednesday's announcement, the BoC kept the rate at one per cent - a record-breaking low that they've maintained since September 2010.

Why are rates so low these days? You can thank unstable economic conditions in the Eurozone, an uncertain future for the U.S. debt ceiling, a strong Canadian dollar, and a suffering export industry. Keeping the cost of borrowing low is the equivalent of the BoC hunkering down and taking cover as the negative impact of these struggling foreign economies hits home. By making it cheap for Canadians to obtain loans, mortgages and credit, they'll be encouraged to continue spending, pumping strength back into our own economy. Should this interest rate rise, though, borrowers will find themselves paying more monthly on their variable loans and mortgages - and those who borrowed at the brink of their affordability could find themselves strapped to make ends meet. While a rise is expected to happen this year, the Bank has assured us that the change will be gradual and adaptable. It's also not expected to increase until after Mark Carney's departure, as he'll be leaving his post of Governor in June for the same job at the Bank of England.

Highlights From This Week's Announcement
In addition to keeping a stimulus stance on interest rates, the BoC also unveiled some key economic numbers. Economic growth has been slower than what was forecast last October, when the BoC projected an increase of 2.3 per cent - instead, it's not expected that we'll break an even two per cent this year. Inflation is also far below the preferred level at one per cent - two per cent is the indicator of a healthy economy. A turnaround isn't expected until much later in the year, and possible not until 2014, when the government expects full economic capacity to occur.

What does this mean for borrowers? Well, we'll be enjoying cheaper borrowing costs for longer - but it's wise to keep the possibility of rising rates in mind, and bunker down for the inevitable. After all, what goes down... must come up! So keep an eye out for the next BoC Rate Announcement, due March 6, 2013.