e54 - Cut to the Chase: Bank of Canada’s Rate Decrease

[00:00:01] Here we are, January 29th. Yes, first rate announcement of 2025. Yes, Bank of Canada came out flying-ish. You've landed on the Mortgage Life Podcast, where we strive to bring you mortgage-related info that's easy to understand. We have conversations with market experts to bring you timely updates, because there's

[00:00:30] one certainty in this industry, things change. I'm Mindy Baudlin. And I'm Pete Salamose. Welcome to the Mortgage Life Podcast. Yeah, at least they're moving in the direction I had hoped they would be moving. Which is what? Downwards with the key policy rate.

[00:00:57] Yeah, so we've been lucky to have seen the 0.5 drops leading up to today. However, today we got a 0.25 reduction to the Bank of Canada's key policy rate. Sweet. So that's a quarter percent down. If you've listened to our previous podcasts about the Bank of Canada rate, you'll know that the Bank of Canada is not the rate that you borrow at, but it's the rate that the banks borrow at. And so they've gone down a quarter point, which means that the charter banks, your mortgage

[00:01:26] lender, credit union, they are most likely going to drop at some point. It's not immediate, but it will be coming at some point. And most likely it will match that same quarter percent drop. Exactly. So we mentioned that every time we record this podcast on the Bank of Canada rates, but it is important to remember that variable or adjustable, there will be real-time changes

[00:01:50] once the banks adjust their prime rate to your mortgage for a fixed rate. If you have a fixed rate, that rate is still locked into the end of your term. But these overall rate reductions could help you at renewal time. So here's an interesting question. And we've talked a little bit about this in the past, but if I'm in the market for a new

[00:02:12] mortgage or I'm in the renewal phase of my particular mortgage and I'm looking for a fixed rate, does this Bank of Canada rate drop affect those fixed rates that I could potentially get on my new mortgage? That is also a very good question, Pete. So yesterday, if the five-year fixed rate was 4.54, today the five-year fixed rate is not going to be going down by 0.25.

[00:02:41] So fixed rates track long-term bond yields. We don't need to get into that detail right now, but just something to keep in mind that, you know, for example, if you are shopping for rates or you have an existing mortgage commitment, it's not a direct impact. We may see in the next week or two weeks that fixed rates may move, but it's not a direct impact like it is with variable or adjustable rates.

[00:03:08] I think this is a question that a lot of people have when they're shopping for a new mortgage and the fixed rates are their target is that they're looking for a fixed rate mortgage, whether these Bank of Canada changes affect it. So that's a really good explanation. I wanted to go into a little bit about Bank of Canada because a lot of people may think that the Bank of Canada is just another kind of arm of the government, the current government.

[00:03:35] And I wanted to dispel a couple of myths, but to start off, pop quiz. And if you're listening, you have to answer this question or at least try. So who is the current governor of the Bank of Canada? Yeah. I'll give huge bonus points if you can actually get this. Do we insert Jeopardy music or? We could. So it is Tiff Macklem. He's been in that position for a couple of years now.

[00:04:04] And yeah, so he is kind of the face of the Bank of Canada. He's the guy that puts out these policy announcements. And I want to go back because we had a little interesting kind of thing happen. If we're talking a little bit about politics here. A number of years ago, there was a different governor of the Bank of Canada. Mindy, who was that? Mark Carney? Yes, Mark Carney. Okay. So Mark Carney. Oh my gosh.

[00:04:33] His name's been all over the media. Just drew a blank there. Too busy thinking about Tiff. So Mark Carney was one of the previous governors of the Bank of Canada. And successively from there, he actually went to become the governor of the Bank of England. Interesting, because we're talking about politics. He has thrown his name in for the race for liberal leader federally. So interesting that the governor of the Bank of Canada, or the past governor of the Bank of Canada,

[00:05:03] because of his extensive experience on that finance side, and he's actually a very, very dynamic speaker. If you ever get a chance, check him out. I think he has been on some late night TV shows like Stephen Colbert, maybe Jon Stewart. Yes. Check it out. Interesting way to market himself. Yes. I know. To the US. But so this is an interesting point, though. As we all know, our like, you know, as of today, our federal government is prorogued.

[00:05:31] They're basically not doing their day to day work in Parliament. However, the Bank of Canada is continuing forward, obviously, with this rate announcement. So they are two separate entities. The government of Canada isn't meant to be the ones making the decision on how money supply is affected. So we're kind of got a few full circle things coming around, like with a previous governor of the Bank of Canada,

[00:06:00] potentially stepping in to be the leader of a federal party, potentially the new prime minister, you know, as well as these two separate entities. So just a quick step back. What is the Bank of Canada? The Bank of Canada is the central bank. It's similar to the Bank of England or to the US Federal Reserve. And their primary job is to control the quantity of money in the economy.

[00:06:29] And so this is why it's important that they be separate, right, from the leading government. You know, they need to be seen as doing what is economically best for the country, as opposed to what is politically best for the current party. Oh, gotcha. So if they were the same thing, then potentially whoever happens to be in government could,

[00:06:54] instead of following the mandate of trying to control the money supply and in turn control inflation, they could just kind of do what they want. So they could do a whole bunch of money or very little money. Yeah, they could kind of, you know, I mean, it's politics, right? It's all political maneuvering. So that being said, the Board of, so the Bank of Canada is run by a board of directors, the head being the governor of the Bank of Canada,

[00:07:20] but the board of directors is actually chosen by the Minister of Finance. So there is some political exposure there for sure. Indeed. So political exposure, but interestingly as well, the Bank of Canada, his, it's the Bank of Canada, the governor of the Bank of Canada, his term or her term is seven years. So they could actually exceed the existing government by at least a couple of years, if not more.

[00:07:50] Yeah, exactly. So you kind of have that same flow, right? The board of directors, their term is only three years though. So all sorts of different, different things at play here. But back to money supply, one of the main ways that the central bank, any central bank controls the money supply is by changing their key policy rate, which is exactly what these rate announcements are.

[00:08:16] So when they lower the rate, it stimulates borrowing and spending in the economy because things are meant to get less expensive, which thereby increases the money supply in the economy. Increased money supply, increased demand for goods, which leads to an increase in price for goods, which is what inflation is.

[00:08:41] So this is why the government of Canada has not, didn't decrease rates in an inflationary environment. But now that inflation is stable, they're looking at lowering rates. But what is going to happen now? This is a good question. And so coming back to today's announcement, if you go through the Bank of Canada's announcement, you'll see that they've essentially said that they're decreasing the policy rate

[00:09:08] because a lot of factors are showing that it deserves to be decreased. So CPI inflation at 1.8%. Unemployment relatively stable. A bunch of other factors, there's kind of some smaller things, but a bunch of other factors are basically saying, hey, we could still decrease a little bit because inflation is still going down. And therefore, we need to stimulate a little bit. We want to be at around 2% to 3%.

[00:09:37] And we're just slightly below. So we will see that rate come down by that quarter percent. And the one big thing that the Bank of Canada said is a wild card, and you probably have guessed this, Does it start with a T? This is the T. So this is the potential for the U.S. to put on a 25% tariff on Canadian goods.

[00:10:03] And that's a big wild card because what it means is anything that the Canadian producers are trying to sell to the U.S. becomes 25% more expensive. So chances are that means that if they're more expensive, then the buyers in the U.S. will potentially buy somewhere else. And that means that Canadian jobs could be lost, etc. So that is a big wild card. We don't know if this is going to happen, but the Bank of Canada has mentioned it.

[00:10:30] They will be watching it, as I'm sure you and I will be both. Absolutely. You know, we kind of got through the last, I'm going to say, black swan event, which was COVID. And, you know, and things have been, you know, trending in a nice, stable way. And I think we've all been looking forward to another sense of normalcy, especially, you know, in the financial markets. So yeah, this is, it's going to continue to be an interesting time. Very interesting time.

[00:10:58] If you have questions about how this rate change affects you, your mortgage, whether you have a variable rate mortgage, an adjustable rate mortgage, whether one of those means that your payment decreases now, or if it doesn't, if it just stays level, ask us. Contact us through The Mortgage Life or reach out to us directly. You've got Mindy Baudoin and Peter Solomosi here. We are always happy to help answer your questions. Yes. And thank you for listening. And when's our next rate announcement?

[00:11:27] That's a really good question. It's going to be in March. And the date, the exact date. March 12th. March 12th. March 12th. Lots going to happen between now and then. Stay tuned. Stay tuned. Come back and listen. This is The Mortgage Life. We look forward to continuing the conversation. So come back and listen.