The Well

Rachel Surman | Blog

Bank Of Canada Keeps Key Interest Rate At 1.25% – What You Need To Know

May 30, 2018

The Bank of Canada (BoC) kept its key interest rate at 1.25%, it said in a statement Wednesday. But, as usual, hinted at a rate increase to come. Here’s what you need to know.

What is the key interest rate?

This interest rate is called the “Overnight Rate” and is what dictates the prime consumer lending rates of Canada’s “Big 6 Banks.” The prime rate is the base rate that banks and lenders use to set the interest on loans and other financial products. 

Why did the key interest rate stay the same?

The central bank noted that the Canadian economy is a little stronger than expected in the first quarter and this could lead to rate hikes in the future.

In a statement, the bank said, “Exports of goods were more robust than forecast, and data on imports of machinery and equipment suggest a continued recovery in investment.”

How does this affect mortgages?

The housing market was cited as one of the reasons the interest rate stayed the same. The bank said in a statement, “Housing resale activity has remained soft into the second quarter, as the housing market continues to adjust to new mortgage guidelines and higher borrowing rates.

A fixed-rate mortgage offers a “locked-in” rate for a length of time and is not affected by the BoC’s rate increases. A variable mortgage, on the other hand, is linked to the prime rate. When the prime rate goes up, so will your variable mortgage rate and monthly payments.

How does this affect lending rates on personal loans?

Interest rates on personal loans depend on the individual. However, borrowing from banks may become more expensive as the rates increase. With consumer debt at an all-time-high, some may consider a low-interest personal loan. Your interest rate won’t change, even if the key interest rate does.

What about the Canadian loonie?

The Canadian dollar experienced a boost after the BoC’s announcement, likely because the bank hinted at a future rate increase. It rose 1.07 cents and now sits at 77.89 cents US in foreign exchange trading. 

What’s next?

Increases to come. “Overall, developments since April further reinforce Governing Council’s view that higher interest rates will be warranted to keep inflation near the target,” said the bank. 

Guided by incoming data, the BoC will take a gradual approach to policy adjustments. The BoC’s next scheduled increase is set for July 11th, 2018.  

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