The Bank of Canada cut the overnight rate by a quarter-percentage point to 4.75 per cent in June, a notable event that has only rippled to a limited extent through the nation’s personal finances.Sean Kilpatrick/The Canadian Press
One interest rate cut by the Bank of Canada is a novelty.
Two cuts is a trend.
We’ll see where we stand with rates next Wednesday, which is the next opportunity for the central bank of change its benchmark overnight rate. The overnight rate was cut by a quarter-percentage point to 4.75 per cent in June, a notable event that has only rippled to a limited extent through the nation’s personal finances.
A second cut next week would confirm the trend of falling rates and thus offers the potential for more of an impact. Here are seven plotlines to watch.
Will the bank even cut?
Inflation unexpectedly blipped higher in May, raising concerns that the Bank of Canada might not cut rates on July 24. But this week’s report on inflation in June showed the pace of price increases pulling back once again. As of mid-week, financial markets assessed a 91-per-cent likelihood of a rate cut coming up. The economy needs lower rates because growth is lukewarm and consumer spending is weighed down by high borrowing costs.
What happens with mortgage rates?
The line from big real estate is that lower rates will revive a stagnant housing market. The last Bank of Canada rate cut resulted in minimal declines in mortgage rates, and housing markets in some cities did look a little better last month. Variable-rate mortgage costs track the overnight rate, while fixed-rates are more influenced by what’s happening in the bond market. Another rate cut by the Bank of Canada would grease the way for lower rates in bonds, and that in turn would blaze a path for lower mortgage rates.
What happens with new-vehicle financing rates?
Today’s high interest rates coupled with the big price increases in recent years are making new vehicles increasingly unaffordable. Dealers are already starting to offer low-rate financing incentives in limited cases – mostly vehicles that are less in demand right now. A rate cut by the Bank of Canada would provide room for rate cuts on a wider range of vehicles. If you’ve been holding off buying a new vehicle, more customer-friendly market conditions are coming.
What happens with rates for guaranteed investment certificates?
The investment industry’s distaste for GICs is clear – better returns have been available from stocks and, besides, GICs don’t pay much in commissions. But many investors have scooped up GICs to lock in virtually risk-free returns that topped out around 6 per cent last year. Top GIC rates are down to about 5 per cent for one-year terms and less for longer terms. Investors should expect lower returns as a Bank of Canada rate cut trickles through the system. GICs are used by banks to fund mortgages, which means both would fall together.
What happens with high-rate savings accounts?
Rates on savings accounts have been edging lower in recent days, but not across the board. Competition between a few alternative banks offering these accounts may explain why their rates have held steady in the 4-per-cent zone lately, even after the last Bank of Canada rate cut. Pressure to cut savings rates will intensify if the central bank cuts again next week. That said, you should still be able to find savings rates that easily beat the latest 2.7-per-cent inflation rate. Not at a big bank, though.
Can hard-hit blue chips find redemption?
Strong stock market returns mask the horrendous performance of several widely held Canadian blue-chip dividend stocks. Falling prices have jacked up dividend yields to as much as 7 to almost 9 per cent in sectors such as utilities, pipelines and telecom. There’s more to the story of these stocks than high interest rates, which typically depress returns from stocks in conservative sectors. But a clear downward trend in rates would at least ease one of the headwinds these stocks face.
Will we finally get that bond market rally investors have been waiting for?
The benchmark index for the Canadian bond market has lost an average annual 0.1 per cent over the five years to June 30, and that includes interest payments as well as changes in bond prices. If you have 30 to 40 per cent of your portfolio in bonds, you’ve paid a price for following conventional investing advice about diversification. High rates crushed bonds, but a sustained rate decline will revive them. The bond market awaits proof rates are in a sustained descent.
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