Bank of Canada Keeps Rate Steady at 1.25%… But Increase is Imminent

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As widely expected, the Bank of Canada decided to keep its key interest rate at 1.25 per cent. This is the second announcement in a row where interest rates have been kept steady this year, after Bank of Canada Governor Stephen Poloz kicked off 2018 with a quarter-point hike.

New forecasts from the Bank of Canada show inflation running higher than the two per cent target. This implies that the BoC may increase interest rates in the near future just to keep prices in check.

Although the global economy is tracking higher than it was when January’s forecast was made, Canada’s GDP growth was also lower than expected. That being said, the BoC is expecting a rebound in the first half of 2018.

In light of previous rate hikes made by the Bank of Canada over the past year, all of the big banks have also increased their rates. But in advance of this announcement, TD Canada Trust dropped its 5-year variable mortgage rate by 0.10 per cent to 2.85 per cent. TD continues to be the bank with the lowest 5-year variable mortgage rate out of Canada’s Big Five banks.

Interest rates affecting Canadians

The steady interest rate announcement has likely made a few Canadians happy. A recent report done for insolvency firm MNP found that 51 per cent of respondents felt rising interest rates would affect their ability to repay their debts.

Since last summer, the Bank of Canada raised its overnight rate three times. And though this wasn’t completely unexpected by forecasters, it still caught many Canadians off guard.

Of those surveyed, 43 per cent of Canadians said those rising rates have already affected their finances while 33 per cent believe that another increase to the interest rate could potentially push them towards bankruptcy.

Growth expected to be more balanced

The Bank of Canada also released a revised monetary policy report, starting that the economy will likely expand over 2018 and 2019 with exports increasing and household spending declining.

If enacted, new measures proposed in various provincial budgets would add about 0.4 per cent to the level of real GDP by the end of 2020.

Rising employment and wage increases will see consumption rise as expected. New construction of real estate has also been contributing positively, especially in Ontario where there’s a lack of supply, but admittedly, resales have softened.

Risks to the inflation outlook

Housing prices have started to moderate in some markets, however, if Canada were to see a housing crash or sizable decline, then consumer consumption and investment would be affected.

Household debt continues to be a concern as of right now, as strong consumer confidence leads to strong consumer spending. This spending is normally not a concern, though, if people are using debt to finance their spending, then there’s clearly an issue.

Weaker Canadian investments is also a concern for the Bank as firms could choose to invest outside of the country. There’s also the possibility of tighter financial conditions which could disrupt projections.

Are rate hikes on the horizon? Quite likely…

Before the announcement, many economists believed that inflation will outpace the Bank of Canada’s two per cent target rate before the end of the year. It’s clear now that the BoC agrees, but has decided to take a more modest approach in response.

The Bank did state in a release that “higher interest rates will be warranted over time, although some monetary policy accommodation will still be needed to keep inflation on target.”

So as the Bank continues to monitor the economy, interest rates will be adjusted accordingly. Based on the news released today, Poloz may decide to increase rates as early as May at their next scheduled announcement on May 30.

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