As widely expected the Bank of Canada (BoC) is holding its key benchmark interest rate unchanged at 0.5 per cent. The Bank says, despite recent stronger than expected economic data surrounding jobs and consumer spending, they’re still not ready to raise their trend setting rate.
Growth not good enough
The Bank admits that growth has exceeded the expectations they set out in their January Monetary Policy Report. The growth however, is largely being fuelled by temporary factors like robust residential investment and increased spending in the oil and gas sector. They also point to a lift in consumer spending due to the bigger child benefit cheques Canadians have started receiving. Additionally, the Bank says export growth has been uneven, and there’s been continued signs of weakness in business investment and employment indicators of hours worked and wages.
The American effect
The Bank says uncertainty regarding U.S. economic policy continues to “cloud the outlook” for Canada. Along with the interest rate announcement, the Bank also released its Monetary Policy Report for April. In the report, the Bank states it’s still unclear how an increase in protectionist policies in the U.S. could impact the Canadian economy.
“A notable global shift toward increased trade protectionism would pose a risk not only to short-run demand but also to long-run growth and prosperity,” says the report. “A move to a significantly less-integrated global economy could also involve a lengthy adjustment process and could require a difficult reallocation of workers and resources across industries.”
The BoC’s move to hold interest rates is out of step with the United States Federal Reserve. In the Fed’s most recent policy announcement, rates were increased for the second time in three months by 0.25 percent, up to 0.75 per cent. A reflection that the U.S. is confident its economy is improving
The long term effects of a U.S. policy that doesn’t support Canada (in the way it has in the past) has dampened the Bank’s forecast for the next two years. The Bank is now forecasting that Canada’s economic growth will slow to 1.9 per cent in 2018, down from its January forecast of 2.1 per cent. For 2019, they’re expecting even slower growth at 1.8 per cent. The U.S. economy, the BoC is expecting, will grow around 2 per cent in those same years.
Good news for mortgage holders
As always low interest rates are good news for anybody with a variable rate mortgage or a floating rate loan like a line of credit. The cost of borrowing for those individuals should remain the same, as commercial banks will likely not raise prime until the BoC raises interest rates. Low rates could continue to fuel real estate prices, which have been seeing year over year double digit growth in some Canadian cities.
The next interest rate announcement by the BoC is May 24th.