It Doesn't Get Much Cheaper Than This!

The Bank of Canada has cut the overnight rate by 0.25% and the Canadian Banks have responded by dropping the Prime Rate. This is good news for anyone who is looking for a mortgage or anyone who has a mortgage.

The Central Bank in Canada, like the rest of us, is concerned with the economic outlook for this year and next. With an expected negative growth rate in 2009, the Bank feels as though it must keep borrowing rates as low as possible. These low rates are only one piece of the monetary stimulus puzzle that our country will be receiving.

This newsletter will look at two tools the Central Bank will be employing to resuscitate our ailing economy.

1. Telegraphing its intentions:

In today's press release the Governor of the Bank of Canada expressly stated that he will be telegraphing his intentions in order to stimulate the economy:

"It is appropriate to provide more explicit guidance than is usual regarding its future path so as to influence rates at longer maturities...the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target."

The Bank no longer has the ability to lower rates. As a result, The Bank telegraphed that it will keep rates low for quite some time. This statement illustrates their stance on the economy.

2. Quantitative Easing:

A term employed by economists that refers to the printing of money to buy up financial assets and therefore increase their value.

The Bank of Canada has alluded to their use of Quantitative Easing (QE). Notably, the Bank has recently placed the definition for QE on their website. This is in line with their recent tendency to discuss the possibility of its occurrence at every opportunity. These references and illustrations of QE present a concerted effort by the Bank to stimulate the economy (see above: Telegraphing).

The Bank of Canada realizes the dangers in printing money to stimulate the economy. Unfortunately, the Bank may no longer have a choice. In the coming Monetary Policy Report, to be released on Thursday of this week, our Central Bank will once again make mention of the requirement for QE. In all probability the Bank is intent on introducing a QE program at its next meeting.

The combined effect of QE and a low prime rate for the foreseeable future will keep our mortgage rates low at least until it is time to ring in the New Year.

With mortgage rates at all time lows this may not be a bad time to refinance your mortgage. Be Careful, there are fees and penalties associated with breaking a mortgage and you should not deal with your lender on your own. We can help you reduce your penalty and negotiate a new rate with your existing lender. In the event that your lender will not work with you to revise your mortgage, there are many lenders who are willing to work with you to set up a new lower interest rate mortgage.

By going through the details of your mortgage, we can determine the penalties associated with breaking and the savings associated with switching to a lower rate. If the savings outweigh the penalties it might be time to switch!

Marcus Tzaferis