Thursday, January 19, 2012

Bank of Canada - Maintians Prime Rate

The Bank of Canada is conceding its decision to keep the benchmark overnight rate at 1 per cent Tuesday will likely increase average household debt.

"Household expenditures are expected to remain high relative to GDP (gross domestic product) and the ratio of household debt to income is projected to rise further," said the central bank in announcing it would hold the key rate steady for the eleventh consecutive review. It hasn’t, in fact, been moved since September 2010.

The central bank's decision on interest rates jives with mortgage industry expectations in the build-up to the announcement.

The move – or absence of a move – further heightens speculation that the government may itself move to curb consumer spending, although not by the method most mortgage professionals are advocating.

The government is much more likely to do away with the 30-year amortization cap, say analysts. Mortgage brokers are also concerned that the government may have already encouraged banks to make the move to lower that ceiling to 25 ahead, or in lieu, of a formal mortgage rule change like those introduced last spring.

While the government lowered the 35-year cap to 30 in March 2011, bank economists are suggesting the government may be forced to consider again lowering it in order to curb consumer debt growth.

Brokers continue to call for tighter regulation of credit card and lines of credit as the best way of lowering Canadian household debt.

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