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Royal Bank of Canada has lowered its posted five-year fixed rate by 15  basis points from 3.89 per cent to 3.74 per cent.

Mortgage rate comparison website founder Robert McLister says RBC is  the first of the Big Six banks to cut its advertised five-year fixed rate after a fall in five-year bond yields.

McLister adds that he expects other big banks to follow suit in the coming  days.

When asked what prompted the rate drop, an RBC spokesperson said a number of factors have impacted the Toronto-based bank's cost of funds.

RBC says that includes the rate the bank pays in the wholesale market, increasing regulatory costs and market volatility.

McLister says now that market volatility has subsided, the bank's competitors have started undercutting big banks which puts pressure on them to act.

 

The Canadian Press

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  • The Bank of Canada left the overnight benchmark policy rate at 1-3/4%, as expected. In another dovish statement, the Bank of Canada acknowledged a slowdown in global economic activity and highlighted that oil prices are roughly 25% lower than what they had assumed in the October Monetary Policy Report (MPR). The lower prices primarily reflected sustained increases in U.S. oil supply and increased worries about global demand, especially in light of a potential U.S.-China trade war (see oil chart below).

The Bank also commented that these worries had been mirrored in bond and stock markets. Credit spreads off Treasuries have widened, and stock markets have sold off around the world (see chart below). Equity prices and bond yields have declined in the face of market unease over global growth. Volatility has risen, and corporate credit spreads have widened sharply. A tightening of corporate credit conditions is particularly evident in the North American energy sector reflecting the decline in oil prices.

Weak oil prices negatively impact the Canadian economic outlook and "transportation constraints and rising production have combined to push up oil inventories in the west and exert even more downward pressure on Canadian benchmark prices. While price differentials have narrowed in recent weeks following announced mandatory production cuts in Alberta, investment in Canada’s oil sector is projected to weaken further."

The Bank acknowledged that the economy is running close to potential, unemployment is at a 40-year low and trade will likely improve with the weak dollar, the trade deal with Mexico and the U.S. (now dubbed "CUSMA") and federal tax measures to target investment. Nevertheless, consumer spending and housing investment "have been weaker than expected as housing markets adjust to to municipal and provincial measures, changes to mortgage guidelines, and higher interest rates. Household spending will be dampened further by slow growth in oil-producing provinces."

The contribution to average annual real economic growth from housing investment has been revised down to -0.1% this year from the +0.1% forecast in October.

The Bank of Canada revised down its forecast for real GDP growth in 2019 to 1.7%--0.4 percentage points lower than the October outlook. According to the Bank, "This will open up a modest amount of excess capacity, primarily in oil-producing regions. Nevertheless, indicators of demand should start to show renewed momentum in early 2019, leading to above-potential growth of 2.1% in 2020."

Inflation remains close to 2%, the central bank's target, having fallen to 1.7% in November, due to lower gasoline prices. While low gasoline prices will depress inflation this year, the weak Canadian dollar will have an offsetting impact on the CPI. On balance, the bank sees inflation returning to around 2% by late this year.

Considering all of these factors, the Governing Council continues to judge that the benchmark policy rate will need to rise over time to a neutral range to achieve the inflation target. "The appropriate pace of rate increases will depend on how the outlook evolves, with a particular focus on developments in oil markets, the Canadian housing market, and global trade policy."

Bottom Line: The Bank of Canada for the first time admits in today's MPR that the slowdown in the housing market has been more dramatic than the Bank's staff had expected. The January MPR states, "provincial and municipal housing market policies, the tighter mortgage finance guidelines and higher mortgage rates continue to weigh on housing activity. Slowing of activity in some markets has been associated with less speculative activity. As a result, it is difficult to evaluate the sensitivity of non-speculative demand to the various policy changes. Monthly indicators have signalled that spending on housing likely contracted again in the fourth quarter. Weaker-than-expected housing activity in recent months and staff analysis suggest that the combined effect of tighter mortgage guidelines and higher interest rates has been larger than previously estimated. The Bank will continue to monitor developments in housing markets to assess how construction is adjusting to the shift in demand toward lower-value units."

The Bank see less urgency to raise interest rates as the economy copes with slumping oil prices and weak housing markets. The five interest rate hikes since mid-2017 are having a more substantial impact on spending than the Bank expected. A short-term pause in rate hikes is now likely. The economy slowed considerably in the fourth quarter of last year, which will continue in the first quarter of this year owing to the decline in oil prices and the Alberta government's implemented oil production cuts.

While it is unlikely that the Bank is finished its tightening this cycle, expect rates to remain steady until we see solid evidence of a rebound in the oil sector and in housing as interest-rate sensitivity of Canadians is at historical highs.

 


Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Please let me know if you have any questions,

Rakhi 
647-886-8710

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iStock debtcalcWith interest rates rising, many Canadians are prioritizing paying down their debts in 2019 according to a CIBC poll.

The survey found that 29% of respondents increased their debt load in 2018. This increase was due to day-to-day items (for 34%), purchasing a new vehicle (24%) and paying for a home repair or renovation (20%).

 More than 1 in 4 (26%) said that that paying down debt is their number one financial priority, followed by keeping up with bills and getting by (14%), growing wealth (12%), saving for a vacation (7%), and saving for retirement (6%).

"Debt weighs heavily on Canadians, so it's no surprise that Canadians continue to put debt concerns at the top of their list of priorities each year," says Jamie Golombek, Managing Director, CIBC Financial Planning and Advice.

Top sources of Canadians’ debt are: credit card (45%), mortgage (31%), car loan (23%), line of credit (22%), and personal loan (11%). 28% say they have no debt.

Better to pay down debt than save
sTwo-in-five Canadians worry that they're forsaking their savings by focusing too much on their debt, but the vast majority (84%) still believe that it's better to pay down debt than build savings.

"There's rarely enough money to do everything, so it's critical to make the most of the money you earn by prioritizing both sides of your balance sheet – not debt or savings, but both," adds Golombek. "It boils down to tradeoffs and balancing your priorities both now and down the road. The idea of being debt-free may help you sleep better at night now, but it may cost you more in the long run when you consider the missed savings and tax sheltered growth." 

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When it comes to buying a house, conventional wisdom would have us believe spring and summer are the prime purchasing months. The sun is shining, gardens are in bloom and “For Sale” signs start to spring up… but perhaps we’re missing out. 

Read on to find out more.

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