By: Kiyoko Fujimura

Usually when the Bank of Canada has a “rate decision day” market experts are biting their nails because it’s not exceedingly clear what Mark Carney’s going to do. But today’s decision to leave the overnight target rate at 1 per cent didn’t even make the Globe and Mail’s homepage. Why? Because it was entirely expected.

Unless you’ve decided to bury your head in the sand in a cave in the middle of the desert, then you know that the world economy is in rough shape. Raising rates discourages the economy and, despite the fact that Canada’s not doing too badly, in this interconnected global economy no one wants to discourage businesses from accessing capital.

Canada’s economy isn’t expected to reach its full capacity until the third quarter of 2013, according to the Bank’s press release. Ideally, that would happen sooner (duh). But Canada’s doing pretty well compared with the rest of the world and because of that, foreign capital is rushing in, driving interest rates even lower. Check out my post from last week about fixed rates hitting record lows.

Here’s the down-low on how it affects the housing market. Fixed rates are largely determined by the interest rate on bonds because bonds have a longer investment horizon. Variable rates, on the other hand, are determined largely by Carney’s decisions. With a variable rate mortgage, usually your interest rate is quoted as “Prime Rate plus x per cent”. While banks are not necessarily required to lower their prime rate when the Bank of Canada lowers their overnight rate*, they usually do. So if Carney raises rates, then your variable mortgage rate is likely to go up too.

Variable rates are low. Fixed rates are INCREDIBLY low. That means that Canadian prospective home buyers and current home owners have unprecedented access to cheap credit. Housing bubble… enthusiasts (?) repeatedly say that until interest rates rise, we can’t tell if prices are over-inflated. Mark Carney is likely going to keep people guessing until at least 2013. The anticipation is killing me.

*In fact, many banks didn’t lower their rates to pass on the savings to consumers when the financial crisis first hit — and consumers were up-in-arms about it!

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