Bank of Canada Holds Rates as Expected

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As expected, the Bank of Canada is holding its key overnight interest rate at 0.5 per cent. In what some are calling the shortest policy statement in history, the announcement was made as scheduled at 10 a.m. on March 1.

The tone remained dovish – similar to January’s statement. Using a soft approach, the Bank says condition for a rate hike still does not exist, despite inflation numbers currently being close to two per cent.

January’s CPI inflation rose to 2.1 per cent. But as the Bank notes, this is reflective of higher energy prices due in part to new carbon pricing measures introduced in two provinces. In its four paragraph statement, the Bank says that these three measures of core inflation continue to point to material excess capacity in the economy.

Pointing to other data, the Bank also says overall economic performance has been consistent with the projections made in January’s Monetary Policy Report. For example, recent consumption and housing indicators that suggested growth in the fourth quarter of 2016 may have been slightly stronger than expected.

But the Canadian dollar and bond yields continue to disappoint. Exports also face ongoing challenges with competitiveness, as protectionist rhetoric increases in the U.S. And while there has been employment growth, there hasn’t been much wage growth, and this remains a concern.

Rate hike in the forecast

In an economic note sent to journalists, Senior Economist at BMO Capital Markets Benjamin Reitzes says, “the Bank’s dovish skew is intended to keep Canadian yields and the loonie under pressure. However, if the data continue to be positive, they won’t be able to deny the obvious for much longer.” This means an eventual rate hike, which some forecasters are expecting in 2017.

A rate hike is good news for anyone with a variable rate mortgage or a line of credit. This will most likely mean commercial banks will leave their prime rate unchanged, giving borrowers the ability to continue servicing loans at the current floating rate.

Reitzes says this statement is “nothing but a placeholder for the BoC.” And adds that the Bank has “opted to remain focused on the negatives, while largely overlooking the recent string of better data.”

The Bank of Canada’s announcement today is in contrast to what’s happening in the U.S. right now.  The U.S. Federal Reserve raised interest rates in its last announcement and the expectation is that they may do the same on March 15 when the Fed meets again.

Forecasters say the probability of a Fed rate hike is now at around 50 per cent. This is leading to growing concern of increased divergence between the Canada and U.S. economic policies.

The Bank says, “In this context, Governing Council judges that the current stance of monetary policy is still appropriate and maintains the target for the overnight rate at 1/2 per cent.”

The next Bank of Canada interest rate announcement is scheduled for April 12.

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