How does the Bank of Canada rate affect Fixed Rates?

The Bank of Canada’s prime rate went down how come the fixed rates haven’t dropped?

Understanding the Connection Between Prime Rates and Fixed Rates

When we talk about mortgage rates, it’s important to understand that there’s a difference between prime rates and fixed rates. Here’s a simple way to look at it:

1. Prime Rate: This is the interest rate that banks charge their best customers for variable-rate loans. It’s closely tied to the Bank of Canada’s overnight rate, which is set to manage short-term economic conditions.
2. Fixed Rates: These are the interest rates for mortgages or loans that stay the same throughout the entire term, such as 5 years. They don’t change even if interest rates in the market go up or down during that time.

Why They Don’t Move Together:

1. Different Influences:
   • Prime Rate: This rate is more affected by short-term changes and decisions made by the Bank of Canada. When the Bank changes its overnight rate, the prime rate usually follows because it affects the cost of borrowing money for banks.
   • Fixed Rates: These are influenced by long-term economic factors and investor expectations. Fixed rates are more closely tied to long-term interest rates and the yields on government bonds. When investors buy or sell these bonds, it affects the long-term rates which, in turn, impacts fixed mortgage rates.
2. Market Expectations:
   • Fixed rates reflect what investors expect to happen with the economy and interest rates over a longer period. So, even if the prime rate changes, fixed rates might not move in the same direction because they’re based on different economic signals and forecasts.
3. Time Frame:
   • Prime Rate: Affects short-term borrowing costs and can change frequently.
   • Fixed Rates: Reflect longer-term trends and are set based on what’s expected to happen in the future, not just the current prime rate.

In summary, while the prime rate and fixed rates are related, they don’t move together because they respond to different factors and time frames. The prime rate adjusts with short-term changes in the economy, while fixed rates are influenced by long-term economic expectations and bond market conditions.