As most forecasters presumed, the Bank of Canada (BoC) announced today that it is holding its benchmark rate steady at 1.5 per cent. However, the expectation is that the BoC will raise rates at its next announcement in October, and continue to do so into 2019.
In a statement released after the policy announcement, the BoC assures it will continue to monitor how the economy reacts to the four interest rate hikes made in the past year before it makes another move, mentioning that it will “take a gradual approach, guided by incoming data.”
Factors that could cause a hike next month
The Bank says that NAFTA negotiations, other trade policy developments, and their impact on the inflation outlook are the main areas of focus right now. But while a rate hike hinges on trade talks with the U.S. as well as incoming data, the BoC seems to believe these international concerns are resolvable in the months to come.
Moreover, inflation hit a high of three per cent in July. Keeping inflation in check is the most important mandate for the Bank; however, in this case, the Bank seems unconcerned as it attributes the rise in inflation to a temporary surge in airfare costs.
Reaction to maintaining rate
In a note sent to journalists, Economist Benjamin of BMO Capital Markets said, “The tone of the statement was consistent with the BoC’s recent messaging that they continue to expect rates to move gradually higher. There were some added notes of caution but the market barely reacted.”
And the U.S. isn’t the only concern for the BoC. Reitzes states, “While the global economy has been consistent with their projections, ‘elevated trade tensions remain a key risk to the global outlook.’ Emerging market stresses received more attention as well, as conditions have worsened there, but so far there’s been “limited spillovers”.
One major note, Reitzes points out, is “the BoC dropped their mention of watching the evolution of capacity and wage pressures from the concluding paragraph. Perhaps that was to increase emphasis on NAFTA concerns.”
How to handle another rate hike
As the BoC holding rates steady, those with a line of credit or a variable rate mortgage will not an increase in their cost of borrowing. But with the economy at full capacity, unemployment at a near record now, and business sentiment high, the BoC’s appetite to raise rates at least one more time in 2018 seems to still be present.
Anyone concerned about their debt levels should start paying off existing loans today, avoid taking on any more unnecessary debt, and use a simple mortgage payment calculator to see how their payments would change if rates increased.
The next scheduled overnight rate announcement is Oct. 24, 2018. The Bank’s full outlook on the economy and inflation, including risks to the projection, will be published in the Monetary Policy Report at the same time.