The Bank of Canada Lowers its Policy Rate for the Second Consecutive Time by 50 Basis Points

In an effort to ensure economic stability and fight inflationary causes, the Bank of Canada made a second consecutive policy rate cut by 50 basis points. This move is in line with the central bank’s overarching goal of assisting the Canadian economy during turbulent times with an ever changing economic landscape.

The new policy rate also indicates the probability that the Bank of Canada will be favouring an increase in borrowing as well as investment towards economic development while giving consumers and companies a break. Let’s see how the Canadian economy and the households and the companies would be affected by this decision.

Why Did The Bank Of Canada Cut Their Rates?

1. Economic Uncertainty

Economy around the world has continued to be in turmoil and affairs that include but are not limited to volatile commodity price, trade wars as well as disappointing growth in vital economies remain a challenge. The cut in the rate by the Bank of Canada seeks to counter such challenges and keep the economy growing.

2. Containment of Inflation

Inflation has not been as aggressive as it was expected but one cannot ignore the necessity to keep it within the boundaries provided. There is also monetary scope such as lowering the policy rate that would assist in bringing the target into the sustenance bracket.

3. Encouraging Borrowing and Expenditures

For both consumers and businesses, a decrease in the policy rate would make borrowing a lot cheaper which would in turn increase spending, investment as well as economic activities.

Effect on Households in Canada

Reduced Mortgage Costs

One would expect potential home buyers to benefit from a decrease in the mortgage rates thereby Home ownership becoming more attainable.

At the same time, existing homeowners with a variable rate mortgage may stand the chance of paying lower amounts monthly.

Lower Barriers to Get Credit

Expansion of the access to personal loans and lines of credit is expected providing household with more financial leverage within the market.

Encouraging expenditures

For the spending areas to grow economies, increased consumer spending can be expected after lowering borrowings.

Effects on Business Sector

Cheaper Borrowing Costs

Business owners would capitalize on the current low interest rates to expand the business, buy various equipment, and cover other business expenses.

Increased Business Profits

With lower amounts paid on loans, business cash flow would improve and stupefied back to the business to drive growth.

Better Financial Backing

May be there is an increase in investment from local and foreign countries and with such upsurge there would be the need for increased active rate cut for economic growth.

Dangers of Reducing the Policy Rate

Although there are many advantages that comes with the decision, there exists areas of concern as well.

Escalated Households Debt: People taking loans in Canada, being charged low interest rates, may worsen the current situation as more people will find it appealing to take loans and this would mean an increase in household debt going forward.

Real Estate Market Heating Up: Hopes of a lower mortgage rate wish wane demand in the housing market, which could increase prices.

Savings Impact: Lower interest rates can reduce the yield of savings accounts and fixed income investments.

How Does The Policy Rate Work?

The Policy Rate, or the overnight rate, is the interest rate paid by a bank to borrow overnight funds from its other banks’ clearing accounts, and vice versa. It affects the cost of borrowing by individuals and enterprises and it is always part of a central bank strategy.

Encouraging Spending: Decreased interest rates with lengthened terms makes lending and borrowing cheaper boosting the economy.

Controlling Inflation: Using an adjustment in the rate assists in containing inflation within the range of 1-3%.

Impacting Currency Value: A reduction in the policy rate can lower the Canadian dollar which can be advantageous to exporters.

FAQs About Bank of Canada’s Policy Rates Decision

What’s the updated policy rate after recently cutting by 50 basis points?

The policy rate has been dismissed by 50 basis points as it new point level indicated in the Bank of Canada announcement.

What are the conditions for me as a consumer with lower policy rates?

It becomes cheaper to obtain loans for mortgages and lines of credit, and so the consumer level is quite lower and have greater options.

Is there any impact on fixed-rate mortgages from this decision?

The policy rates determining the bond yields affect fixed-rate mortgages, proceeds from the sale of bonds may also go down when policy rates are slashed.

What will the impact on Canadian dollar value be one this cuts?

The policy rates when pegged at the lower side tend to devalue the Canadian dollar making the dollar detrimental to importers but a plus for exporters.

What are the impacts of a policy rate that is lower than the average?

An over reliance on the policy money may result in domestic debt, price frenzy in the homes category, and unencumbered investment for those that choose to save.

If so for what reasons did the Bank of Canada decide all at once to lower base rates?

The economies performance finally faltered and thus needed mobilization of economic resources and liquidity to cover the mounting gaps.

What are the implications of this for small businesses?

Affordability of credit by small businesses would be made easier as a result of slashing the rates, in turn this would enhance their capacity to lift capital and ease their cash flow.

Now if inflation takes a turn for the worse, what next?

That won’t be the only available solution, the reserve bank of Canada one can say could also decide to alter rates for all the sectors.

Does this also move the rates for savings accounts?

Yes and no, savings accounts across the board will earn lesser returns when low single digits and at times even negative interests would go through diminishing returns.

When next should we expect the Bank of Canada in adjusting the policy rate?

That isn’t the end of the story on policy rate adjustment since they can also do this eight times a year due to their stringent calendar.