Bank of Canada surprises investors; keeps rates the same

Earlier this week, the Bank of Canada announced that they are holding the line again on interest rates, keeping their overnight rate at 1%.
The bank noted that several economic factors appear to be improving:

  • Very strong Canadian growth
    • Improved wages
    • Robust consumer spending
    • Business investment
    • Public infrastructre spending
  • Stronger than forecasted US third quarter growth
  • Firming growth in other advanced economies
  • Higher oil prices
  • Easing financial conditions

Despite these developments, they highlighted “considerable uncertainty” in global outlook, particularly related to geopolitical developments and outcomes of ongoing trade discussions. As well, inflation seems to be higher than anticipated, and labour market slack still persists. As a result, they decided to keep the overnight rate at 1%.
That being said, there could be additional pressure to raise rates soon.
For example, the day after the announcement, the loonie dropped. Investors assumed the strong economic data emerging at year end would encourage the Bank of Canada to raise rates, and holding rates and implying no reason to raise them in the first quarter quashed those expectations.
In addition, David Rosenberg, Chief Economist and Strategist with Gluskin Sheff + Associates, reported that the common belief is that change is coming next year:

“The consensus seems to think the Bank of Canada is still going to tighten policy three times in 2018. The markets are priced for 2½ hikes (62 basis points versus 74 basis points for the Fed).”

He offers caution though, supporting the Bank of Canada in its cautionary policy:

“The uncertainties around the forecast are simply far too wide — trade, housing, bank regulations, fiscal policy, minimum wage hikes and the impact this has on the labour market. A tighter monetary policy would do more to compound these uncertainties that Stephen Poloz et al. are concerned about than alleviate them.
“Besides, one has to wonder if the economists on the street calling for two or more rate hikes realize that this would risk inverting the yield curve and thereby raise recessionary risks. And for those that believe that the Bank of Canada is taking unnecessary risks by staying put, just consider that since the beginning of 2016, monetary policy in Canada has tightened, in aggregate, by more than 400 basis points (as per the Bank’s old Monetary Conditions Index).”

Either way, the good news is that with interest rates remaining stable, variable rates won’t increase. With fixed rates remaining low, it still gives you time to lock in at the current rates.
If you have any questions about this announcement or its effect on your ability to get a mortgage, contact us today.

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