While the world has been buckled up, discount anticipating a swift rally in rising interest rates, the Bank of Canada delivered a very welcome surprise in January. Cutting the key benchmark rate down to a mere 0.75 per cent on January 21, 2015 sparked a lot of media attention.
Bloomberg News describes the interest rate deduction as an effort to protect the Canadian real estate market, but it's doing more than that. It has a lot to do with the current oil prices.
Oil prices have been free falling and together with a rise in interest rates, leverage-dependent energy companies would have seen severe compression in profit margins. There are forces across the globe that might like to see smaller firms pinched, but the Bank of Canada's Governor has made it clear this nation's firms won't be a victim.
The Globe and Mail argues this new 2015 rate cut may not equate to an instant reduction in home mortgage interest rates or monthly housing payments for Canadians. It's important to understand there is a difference between the benchmark rate and consumer mortgage rates. It's really a question of whether individual banks and mortgage companies pass on those savings to their customers or not.
However, given recent mortgage trends, it's hard not to anticipate these financial firms won't be able to resist competing. Additionally, low home loan and commercial mortgage rates will result in less borrowers defaulting.
For Canadian property investors, it also means more cash flow and higher yields on income properties. Analysts commenting in the global news media expect this cut to keep more Canadians working and protect their individual paychecks too, all while fueling more consumer spending.
The bottom line here is that more free cash and confidence in Canadian property is likely to create an additional surge in investment, demand, and prices.