March 2, 2009 - OTTAWA - In another attempt to stimulate the sluggish economy, the Bank of Canada governor Mark Carney cut the interest rate to 0.5%, the lowest ever. The Bank has cut the key rate by four percentage points since December 2007.

In its announcement the Bank stated that this rate is to remain at its current level or lower until there are “clear signs” that the economy is recovering. This rate cut, the seventh in the last year, was widely expected by economists.

Carney also said it is possible that the Bank may provide additional stimulus, if necessary, by purchasing credit and other assets.

Commercial banks immediately began to follow suit. RBC Royal Bank quickly announced it is trimming its prime lending rate by 50 basis points to 2.5%, effective tomorrow, and the Bank of Montreal said it is lowering its variable mortgage rates, effective tomorrow. Other Canadian banks cut lending rates as well.

Rate cut impact may take time
While rate cuts are designed to have a simulative effect on the economy, most experts believe the cut will have a minimal impact. The central bank has cut its rate from 4.5% 15 months ago to 0.5%, to little effect.

Many economists predict that it could take anywhere from 12 to 18 months for interest rate cuts to take effect, which means today's announcement won't provide immediate relief.

"The effects of the recent aggressive monetary and fiscal policy actions in Canada and other major economies will begin to be felt in the second half of this year and will build through 2010," Carney said. "Once the global financial system stabilizes and global growth recovers, the underlying strength of the Canadian economy and financial sector should ensure a more rapid recovery in Canada than in most other industrialized economies."

How will this affect mortgage prices?
Those with existing variable rate mortgages will benefit directly – these mortgages are linked to the prime rate. However, there can be some variation in when, or to what degree, lenders react to a Bank of Canada rate announcement. There are lenders who change immediately after a Bank of Canada rate move, while some lenders re-set their prime rate on the first of the month following and some even do so quarterly. In addition, after recent rate announcements by the Bank, some lenders matched the Bank’s drop only after a delay, and some did not match the full rate cut.

Currently, pricing for new variable-rate mortgages is typically above the prime rate. Those looking for a new variable-rate mortgage may wish to get pre-approved, to protect themselves if variable-rate pricing in relation to prime continues increase in the next few months.

Pricing for fixed-rate mortgages is not directly affected by today’s announcement. However, some fixed rates have been trending downward in recent week.