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Bank of Canada Reduces Interest Rates Jan 2015

February 1, 2015 - Updated: February 27, 2019


Bank of Canada Surprise Reduction in Rates

On January 21st, the Bank of Canada, in a surprise move, cut its overnight rate by 25 basis points to 0.75%. This is the lowest that the prime rate has ever been since records began.


The Bank’s justification for the drop in the rate was the recent precipitous drop in oil prices by close to 60% to roughly $40/barrel in the last six months. Canada relies heavily on oil exports for growth, so the income from such exports is now reduced. Economists now say that other sectors such as agriculture and manufacturing will have to step up in lieu of the oil and gas sector. The Governor, Stephen Poloz, said that investment and employment in the sector has already fallen.  Government tax revenues are also expected to fall. Inflation is also below the Bank’s target, further necessitating a rate cut.


Impact on Canadian Consumer

The benefit to the Canadian consumer of this quarter % point drop is that they now have more disposable income as a result of marginally lower debt burdens, and of course they are also enjoying the benefit of lower gas prices.


Canada’s Commercial Banks Fail To Match Rate Reduction

Canada Interest RatesCanada’s commercial banks reduced their prime rates by 15 basis points to 2.85%, failing to match the Bank of Canada’s 25 basis point reduction. The prime interest rate is used to price various variable rate mortgages. This has led to speculation that the Bank may further reduce its overnight rate in March to spur additional reductions by the commercial banks. This has led to speculation that the Bank may further reduce its overnight rate in March to spur additional reductions by the commercial banks. Any further reduction is likely to be dependent on oil prices at that time though.


The Impact on the Housing Market for 2015

As in prior years, the most recent Toronto Real Estate Board (TREB) statistics (for November 2014) show a shortage of housing inventory relative to demand. With 14,717 active GTA listings on the MLS system as of the end of November 2014, compared to 16,092 at the same time in 2013 (an 8.5% drop), we can expect a heated market in 2015. The weather also appears to be better this year compared to last year, which is also likely to contribute to an earlier boost in activity compared to seasonal norms. I have already witnessed multiple offers organically developing on properties without an offer date on Day 1 of them being on the market in parts of Vaughan & parts of Markham this year. Home buyers are in for a fight for the home they really want, and home sellers have the advantage, as in prior years.

If the Bank of Canada reduces its overnight rate again in early March as predicted by TD & other banks, then we are likely to see even more heated bidding wars, particularly in the low rise housing market where inventory is woefully short. The condo market should also benefit from further rate reductions, since the supply/demand situation is more balanced in the this market.

As always, you should make your home buying or home selling decision after carefully considering your personal finances and situation, and after consulting with a professional realtor to determine timing & strategy to ensure a successful transaction.


Ram Rajendram is a Toronto Real Estate Broker with Century 21 Harves Realty Ltd., Brokerage. He sells condos & houses throughout the GTA & assists home & condo buyers with their purchasing needs. He is also a Canadian Chartered Accountant  (CA) & holds a Bachelors Degree in Economics from the London School of Economics (LSE)

Tagged with: canada interest rates 2015 canada mortgage rates 2015 canada mortgages
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