Bank of Canada Holds Rates as Expected

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As expected the Bank of Canada has held its overnight rate at 1.75 percent.  The Bank pointed to global and domestic concerns as key reasons for leaving rates unchanged. The Bank also says it remains concerned about the performance in the energy sector and a weaker than expected housing market.

In its statement the Bank says, “Global economic growth has slowed by more than the Bank forecast in its January Monetary Policy Report (MPR). Ongoing uncertainty related to trade conflicts has undermined business sentiment and activity, contributing to a synchronous slow down across many countries.”

Slower growth

Canada economy is growing slower than what was anticipated in January. The Bank now expects growth to pick up in the second quarter of 2019. The housing market has been under pressure after the bank raised rates 5 times in 15 months and new home-buyers are dealing with stricter borrowing rules. The Bank says, “Housing activity is expected to stabilize given continued population gains, the fading effects of past housing policy changes, and improved global financial conditions. Consumption will be underpinned by strong growth in employment income.” The Bank projects real GDP growth of 1.2 percent in 2019 and around 2 percent in 2020 and 2021.

Inflation remains in check

CPI and core inflation remain close to two percent. Keeping inflation in check is the Bank’s core mandate. They expects inflation to dip in the third quarter, largely because of the dynamics of gasoline prices, before returning to about two percent by year end. The bank says, it is monitoring developments in household spending, oil markets, and global trade policy to gauge the extent to which the factors weighing on growth and the inflation outlook are dissipating.

Rate on hold

In a note sent to journalists after the announcement, BMO economist Benjamin Reitzes says, “The BoC is officially neutral. The wider output gap means that any potential hike is a long way off, while the conservative growth forecast for Q1 and Q2 means it will take an exceptionally poor data run to underperform and prompt more dovishness. Accordingly, the bar for a rate move in either direction is quite high at the moment, leaving us quite comfortable with our call for policy to remain on hold for the rest of 2019.” Reitzes says the biggest surprise was the sharp cut to the growth outlook.

The news that rates will be held steady is great for anyone with a variable rate mortgage or floating rate loan. This is also a great opportunity to make lump sum payments on debt that you are worried might become unaffordable if rates were to rise.

The next interest rate announcement is May 29, 2019. 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 on July 10, 2019.

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