What is normal for Interest rates?
CREA The Canadian Real Estate Association with Mr. Blissett Real Estate Market Analyst What is normal for Interest rates? What will happen to Canadian home prices once interest rates return to “normal”? This presumes that “normal” interest rates are significantly higher than where they are now. But just what are normal interest rates? The answer requires an appreciation of past levels for the Bank of Canada’s trendsetting Bank Rate. That’s the interest rate to which all personal loans, lines of credit, mortgages and other administered lending rates are tied. From 1935 to 1955, it remained stable between 1.5 and 2.5 per cent, which is only slightly higher than where it is now. Beginning in 1955, the Bank of Canada began raising the Bank rate to defend Canada’s fixed currency exchange rate, which was part of the post-World War II monetary system. In 1973 the gold standard and fixed exchange rates were abandoned and exchange rates were allowed float.
Following oil price shocks in the 1970s, annual inflation in Canada and many other western economies consistently topped seven per cent. To fight inflation, the Bank of Canada (and other central banks all over the world) dramatically increased interest rates. In Canada, the Bank rate peaked in 1980 at north of 20 per cent. As inflation began to cool, interest rates also eased. Throughout the late eighties through the early 2000’s, interest rates were adjusted to combat economic shocks, but the overall trend was downward.
In 2008, as the global financial crisis rocked the economy the Bank of Canada dropped the Bank rate to a record low 0.5 per cent. It was subsequently raised to 1.25 per cent in September 2010 where it still remains. So what does history teach us? Looking back, it becomes apparent that there has never been a “normal” level for interest rates. This should be no surprise. Interest rate levels reflect a number of factors, all of which vary with economic circumstances over time. There is little evidence that interest rates are set to rise significantly in the near future. That’s because the Bank Rate is tied to the Bank of Canada’s inflation target of between one and three per cent. The outlook for inflation in Canada shows few signs of moving beyond that range. To find out more about current interest rates and other economic indicators including the latest real estate market statistics visit www.creastats.crea.ca. Don’t forget to subscribe to our channel. There will be more Market analysis videos to come.