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Today’s Rate Relief Likely First in a Series

8 October 2008

Toronto home buyers were relieved to see mortgage rates reduced today by 0.25%. It is still possible to get a closed 6-month rate of 5.35% (MRS Trust), and a closed 5-year rate of 5.25% (Canadian Tire and Comtech). However, the average 6-month rate is 6.25%, and the average 5-year rate is 6.41%.

Today’s rate drop was not as much as expected, but it is probably only the first in a series of decreases likely to occur this fall and winter. The Big 5 Canadian banks departed from their usual practice of automatically matching the Bank of Canada’s 0.50% decrease. The prime rates in Canada and the U.S. are now identical, at 4.5%.

The Bank of Canada’s interest rate decrease was planned with the United States, China and Europe to restore confidence in the international banking system and encourage spending. It is the first time since the Twin Tower attacks of September 2001 that the Bank of Canada changed its regularly scheduled interest setting to collaborate with other governments. U.S. banks dutifully accepted the lead of their Federal Reserve by reducing their prime rate to 4.5% today. Canadian bankers say they cannot lower interest rates further because money is scarce and it is very costly for them to borrow from foreign banks now. Australian bankers agreed with the Canadians, and also refused to follow their central bank’s rate cut. The UK intends to partly nationalize its banks. Mortgage Lenders in Singapore, Hong Kong, Dubai and Mumbai are profiting from western banking problems.

The Bank of Canada next sets its interest rate on October 21. Another reduction is expected. The Bank of Canada has already increased liquidity, made short-term loans to commercial banks, and eased its collateral requirements in a multi-pronged approach to lessening the impact of the American credit crisis here in Canada.

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