Overnight lending rate through the floor!
Last week the Bank of Canada surprised everyone and dropped the overnight lending rate. There had been strong speculation that the rate will actually rise this year, given that our dollar has dropped so much mostly due to the drop in oil prices, and the strengthening US dollar. As well the US economy is actually picking up, so their overnight lending rate has been predicted to increase – which will put pressure on our rate to follow.

So the when the BoC dropped the rate, it caught everyone off guard. When I actually heard the news, I needed to verify myself on as many sources as possible – no doubt so did many economists. The banks are pretty quick to raise their prime rate when the BoC increases the rate, but they do take their time to drop the rate. This appears to be the same pricing model the gas companies use.

The discounts over the past month or so have been pretty aggressive, which suggests the banks were in fact expecting a rise.

A couple of things that do not go unnoticed by the savvy consumer is the time it too the banks to drop their Prime rate, and the fact they did not drop by the same amount – the overnight rate dropped 25 bps, while the banks’ Prime all dropped by only 15 bps.
Another thing worth noting, each bank has their own prime rate. There is no law that says they all have to have the same Prime. Nor is there any law that says they all have to drop by the same amount, nor at the same time.

Although the variable rate looks very attractive, the fixed rate (already there is 2.79% 5yr fixed in lurking around), I am sure that there will be even tighter scrutiny on qualifying for a mortgage.

I can’t predict the future – but there is one sure thing I know – neither can anyone else.