Bank of Canada Rate Decision: Long Pause

The Bank of Canada suggests lower mortgage rates may be comingThe Bank of Canada’s decision to leave rates alone was far from its most important message today.

More on that to follow, but first, here’s a quick take on what the BoC said this morning:

  • Rate Decision: It left Canada’s key interest rate at 1.75%
  • Prime Rate: Prime rate remains at 3.95%
  • Market Rate Forecast: At least one rate cut by end of 2020
  • BoC’s Headline Quote: “…an accommodative policy interest rate continues to be warranted…We are monitoring developments in household spending, oil markets, and global trade policy…”
  • Neutral Rate Update: The BoC dropped its estimated neutral rate range by 1/4-point to 2.25% to 3.25%.
  • BoC on GDP Growth: “…the Bank projects real GDP growth of 1.2% in 2019 (down from its prior forecast of 1.7%) and around 2% in 2020 and 2021.”
  • BoC’s Full Statement: Click here
  • Next Rate Meeting: May 29, 2019

The Spy’s Take

Bank of Canada Governor Stephen Poloz didn’t want to give up on hikes, but economic growth risks forced him to weaken his hawkish tilt.

As of today, the BoC is no longer telegraphing higher rates. It removed this important language from its rate announcement for the first time since the end of 2017. That’s pushed down Canadian rate expectations across the board today.

A Lower Neutral Rate

The Bank of Canada cut its neutral rate, which is supportive of variable mortgage ratesThe bank has cut its neutral rate forecast, as we anticipated a few months ago. That’s key because the market relies on the neutral rate range to understand the Bank of Canada’s future policy direction.

Jargon Buster: The “neutral rate” is the rate that neither supports nor suppresses economic growth and inflation. The BoC formally updates its neutral estimate once a year.

The new neutral range is now 2.25% to 3.25%, down 1/4-point from the bank’s prior estimate. Remember, it wasn’t that long ago that the BoC believed the neutral rate was north of 4%.

How to Play It

Should you take a fixed or variable rate?The market unequivocally viewed today’s BoC move as bearish for interest rates. That was reflected in Canada’s 5-year bond yield, which is down 7 basis points on the day to 1.49% (its first time below 1.50% since March).

Today’s news gives variable-rate borrowers comfort as the market believes the next BoC move will be a cut. And it’s rare for a central bank to cut rates and then reverse them higher soon after. Hence, if you believe the market, the odds are good that we’re entering a long pause in rates or (eventually) a new rate-cut cycle.

Of course, we must acknowledge that while the economy has slowed “more than expected” (the BoC’s words), the bank also views it as “temporary.” Poloz said, “we firmly believe” the BoC’s economic models are “right.” And if so, “interest rates are more likely to go up than down over time.”

Mind you, “We need some positive data to confirm that this outlook is the appropriate one,” he admits. For now, “Rates are appropriate for this outlook.”

But even if we get more hikes, as some economists still predict, the bank now expects rates to level out as little as 1/2-point above its rate today. Coupled with market expectations for future rates (rate forwards), the implied risk to variable- and adjustable-rate borrowers is more limited than it has been since 2015-2016.

This is why many keep betting on variable rates despite the evaporation of their rate advantage versus 5-year fixed rates. Albeit, we could see short-term fixed rates dip below variable rates if bond yields sink further and prime rate remains at 3.95%. That could make 1-, 2- and even 3-year fixed rates more appealing in coming weeks.


  • Caroline Loughran says:

    Who can offer the best rate for home owners trying to get ready to retire in the next few years.
    The intent is always to down size and aim is to have no mortgage, therefore no penalties. However, with house prices on the rise even the down sizing might still leave some principal to pay for the right home.
    Thank you

  • Mike says:


    Choose a lender with a good penalty policy. If you get a 5 year fixed that means you should avoid big banks and many credit unions. If you get a variable, it is less important as long as the lender has a standard three month interest penalty.

    Make sure the lender has a good porting policy also. Some lenders only give you 30 days to port your mortgage to a new home. There is often a longer gap between the sale of an old house and purchase of the new one.

    I think your best bet would be to find the lowest rate you can for the term you want. Then call the lender to see if it offers the above. If it doesn’t, move on to the next lender. Or just get a broker to shop for you.

  • Carol O'Brien says:

    Remortgaging this September. Thoughts? Should I try lock in now at 3.09% or wait for better? Current rate is 2.49 so want to keep for aslong as i can.

  • manu says:

    If you didn’t get an early renewal offer from your lender you’ll probably have to wait till June when you’re within 120 days of maturity. You won’t get a good rate outside of 120 days.

  • Terry says:

    My renewal is up on July 1st current rate of 2.29 and Td is offering 3.19 for 3yrs fixed or 3.04 for 2 yrs fixed.Is Will todays announcement mean some better rates before July ?


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