Bank of Canada May Announcement: No Surprise


No surprise here, the Bank of Canada has left rates unchanged at 0.5 per cent.  The Bank notes the economy is performing just as they expect, but the conditions have still not improved enough to raise rates. And once again, the Bank trumpeted its fears for those living in Canada’s hottest real estate markets, like Toronto and Vancouver, and if they would be able to handle an interest rate hike.

Here’s what you need to know about the latest announcement and what is affecting the decision.

Alberta wildfires

The fires that have devastated the town of Fort McMurray and the oil refineries that surround it are expected to push Canada’s GDP for Q2 into the red. Oil production in the region is expected to be cut back in the coming months. In its latest monetary policy decision statement, the Bank said, “Fire-related destruction and the associated halt to oil production will cut about 1¼ percentage points off real GDP growth in the second quarter.” They had already predicted a weak quarter because of low oil prices, but the fires have only exacerbated the issue.

Oil prices

The price of crude has climbed significantly in the last quarter. After dipping below $30 US per barrel, it is now comfortably sitting at $49 US. But it’s still not enough to encourage the Bank to raise rates. In its statement the Bank notes, “Oil prices are higher, in part because of short-term supply disruptions, “which isn’t always the most reliable indicator. If supply was to increase, oil prices could come under pressure again. This, along with the wildfire disturbance, is creating an uncertain future for one of Canada’s most important commodities.

More improvement needed

In response to the latest interest rate announcement, BMO economist Benjamin Reitzes said, “It’s clear that the bar for any rate move from the Bank of Canada remains high.” The Bank won’t raise rates, until they are completely sure the economy can handle it. One positive is that inflation is right on target and the Canadian Loonie has also improved, both signs of a stronger economy moving ahead. However, concern still remains in Canada’s hottest housing markets. The Bank says “Canada’s housing market continues to display strong regional divergences, reinforced by the complex adjustment underway in the economy. In this context, household vulnerabilities have moved higher.”

Looking ahead, the U.S. Federal reserve is expected to raise rates in 2016. That could also have an impact on rates for Canada.  For now, Canada remains in “wait and see” mode, as rates continue to be held at near historic lows.  The next scheduled date to announce the overnight rate target is July 13th, 2016.

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