Bank of Canada December Announcement: Debt and Oil Prices Cause Concern

Bank of Canad December Announcement Highlights

The Bank of Canada’s December Interest Rate Announcement was made this week in the spirit of predictability; the Bank maintained central interest rates at one per cent yet again, marking the longest stretch of untouched economic policy since the 1950’s.

Rates have been stagnant since September 8, 2010 as a recovery method for Canada’s post-recession economy. However, while the BoC’s latest announcement surprised no one, it did contain new undertones of growing threats to recovery – mainly plummeting oil prices and rising household debt – despite broad gains in economic growth. Should Canadians be concerned? Here’s our breakdown of the latest.

Oil Prices Making an Impact

Sliding oil prices, while not a major concern, have factored into the Bank’s most recent stance. “Oil prices have continued to fall, due to both supply and demand developments. In this context, global financial conditions have eased further,” states the BoC’s release, adding that “…the lower profile for oil and certain other commodity prices will weigh on the Canadian economy,” and will effectively counter any recent inflation growth.

Household Total Debt Back In the Spotlight

The amount of debt taken on by Canadians has again reached cause for concern – this week, a new report by Equifax Canada showed Canadians amassed another $1.5 trillion in debt in the third quarter of this year, ending September. Debt is rising 7.4 per cent faster than it was at the same time last year. The majority – two-thirds – of the debt is mortgage-based, which is reflective of the impact from the hot real estate market. Cheap borrowing rates continue to encourage Canadians to take on more loans. Stripping out mortgages, Canadians on average owe $20,891.

The Bank touched on this growing concern, stating in its release, “Household imbalances, meanwhile, present a significant risk to financial stability.”

Inflation: One Step Forward, Two Steps Back

The Bank says inflation has risen by more than expected, but it still lower than 2 per cent, the target required to fuel economic growth. The Boc states that the increase in inflation over the past year is largely due to the temporary effects of a lower Canadian dollar and some sector-specific factors, notably telecommunications and meat prices. Raising rates now could derail any plans to bring rates to optimum levels. Already there are reports that food prices are expected to rise faster than expected in 2015, which could have a further effect on overall household debt as Canadians borrow to pay for everyday items.

Looking South For Next Steps

Canada continues to look to the U.S. for clues to when it should raise rates. If the U.S. Federal Reserve raises rate, Canada central bank would be close behind. In this week’s commentary after the rate announcement, the Bank said, the U.S. economy has clearly strengthened, particularly in business investment, which has benefited Canada’s exports. However, global growth, in contrast, continues to disappoint, leading authorities in some regions to deploy further policy stimulus. Oil prices have continued to fall, due to both supply and demand developments. In this context, global financial conditions have eased further.

What’s Next?

The next rate announcement is January 21, 2015. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR at the same time. The expectations is the BoC will keep rates at 1 per cent into late 2015.

Do you think lower oil prices and high levels of debt are posing a risk to our economy? Tell us in a comment or visit us on Twitter and Facebook.



Related Topics

Economic News / Mortgage News / Mortgages

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