The Bank of Canada has announced that its target for the overnight lending rate will remain at 0.25 per cent and has further reiterated its commitment to hold the overnight rate at this level until the end of the second quarter of 2010. The overnight rate is the rate at which major participants in the money market borrow and lend funds to each other for one day. Other benchmark rates like the prime rate are generally expected to follow the Bank’s decisions to raise or lower the overnight rate target.

The Bank of Canada’s forecast for economic growth and inflation is largely unchanged. The rate of inflation, as measured by the Consumer Price Index (CPI), is forecast to reach the Bank’s two per cent target in the third quarter of 2011.

The Bank’s main lever in controlling inflation is the level of interest rates, with the idea being that lower interest rates promote more consumer spending and, by extension, higher rates of inflation. Conversely, higher interest rates should result in less consumer spending and lower rates of inflation.

The consensus in Canadian credit markets is for a 200+ basis point (two percentage point) increase in the overnight lending rate by the end of 2011.  Longer term Canadian government bond yields are also expected to increase, but by a lesser amount. Shorter-term and variable rate mortgage products generally move closely or in concert with the prime rate. Longer term mortgage products (e.g. 5-year fixed rate mortgages) more closely follow Canadian government bond yields.

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Jason Mercer – TREB Senior Manager of Market Analysis

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Filed under: Real Estate News

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