The Bank of Canada Leaves April Rate Unchanged

Bank of Canada Announcement

The economy may be in a slight upswing, but it’s not enough to change the Bank of Canada’s stance. The central bank has opted to leave its trend setting Overnight Lending Rate at 0.5 per cent, where it has remained since July 2015. The bank rate remains at ¾ per cent, and the deposit rate at ¼ per cent.

Tentative, but Temporary, Growth

Like a crocus poking through the early spring soil, there have been small signs of encouragement from the economy throughout the beginning of the year. GDP grew by a surprisingly strong 0.6 per cent in January, manufacturing and exports have improved, and 40,600 jobs have been added to the workforce. However, the BoC believes Q2 won’t be quite as rosy, as low oil prices will continue to “dampen growth throughout the Bank’s projection horizon.”

“First-quarter GDP growth appears to have been unexpectedly strong, but some of that strength is due to temporary factors and is likely to reverse in the second quarter,” the BoC states in its release. “Still, it does appear that the positive forces at work in the economy are starting to outweigh those that are negative.”

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Inflation, while tracking as the BoC expected, is below its 2 per cent target, and is expected to drop further due to the Canadian exchange rate and lower energy prices, before reaching normal capacity.

Oil is a Main Drag

The sudden and deep drops in oil prices in 2015 prompted the BoC to slash interest rates in January and July to help counter economic shock. While oil prices have performed better than the Bank expected this January, they’re still far below their historical averages and further cuts to energy sector investment and jobs are anticipated, with investment down by 60 per cent compared to 2014.

Improvement in the exports industry, pegged to be the economy’s saving grace in oil’s absence, has also been hindered by the loonie’s recent rally and slower-than expected growth in the U.S., Canada’s biggest trade partner.

Help from Government Hand-Holding

The BoC admits current factors would have led it to downgrade its economic forecast had it not been for the massive $120 billion in planned spending from the federal government. The Liberals announced in the March federal budget they would infuse cash into a number of infrastructure and social projects. The BoC has found the spending will have a “notable” positive impact on GDP and calls for 1.7 per cent improvement this year (up from the January forecast of 1.4 per cent), 2.3 per cent in 2017, and 2 per cent in 2018. States the Bank, “This new growth profile, combined with the revised estimate for potential, suggests the output gap could close somewhat earlier than the Bank had anticipated in January, likely in the second half of 2017.”

What This Means for YOUR Mortgage

As our expert Mortgage Rate Outlook Panel forecasted early this month, prices for both fixed and variable mortgages won’t be budging higher any time soon. Canada’s banks will follow the Bank of Canada’s lead and keep their Prime cost of borrowing at status quo, while competitive lenders and brokers may shave additional basis points off their variable offerings. Those currently in variable mortgages won’t see any fluctuation in their monthly payments.

Fixed mortgage rates, while not directly mandated by the Bank of Canada, will also remain competitively priced. Bond investors, attracted by prolonged loose monetary policy, will keep bond yields, and fixed rates, low, and lenders typically introduce their best pricing of their year at this time, with brokers offering five-year fixed rates as low as 2.30 per cent, and BMO leading the big banks with a flashy 2.59 per cent.

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The next Bank of Canada interest rate announcement is scheduled for May 25, 2016.

 

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Mortgage News / Mortgage Rate Outlook Panel / Mortgages

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