As expected, the Bank of Canada announced it is maintaining its benchmark interest rate at 1.25 per cent. This comes after the Bank hiked its rate by 25 basis points back in January. But new economic developments in international trade are raising concern and leading the Bank to now hold rates steady.
Despite the global economy appearing rosy as of late, the Bank is worried about the implications of the current NAFTA negotiations with the United States. In its announcement release, the Bank says, “Global growth remains solid and broad-based.”
The Bank also mentioned that the new government spending and tax cuts in the U.S. are expected to boost growth this year and in 2019. It goes on, “However, trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks.”
There wasn’t a press conference or Monetary Policy Report (MPR) released, but Canadians can still glean a lot of information from this announcement.
The economy grew by three per cent in 2017. That brings the level of real GDP in line with the projection in the Bank’s January MPR. The Bank notes in the fourth quarter, GDP growth was slower than expected, largely due to higher imports.
In the meantime, inflation is close to the Bank’s target of two per cent, which also indicates no immediate need to raise rates. Generally speaking, central banks hike rates when inflation is rising too fast, and cut rates to stimulate growth.
Bank to continue monitoring impact on housing
In terms of housing data, 2017 ended strong, followed by softer numbers at the beginning of this year due to new mortgage guidelines and other policy measures taking effect. The Bank says it will take some time to fully assess the previous rate hike’s impact on housing demand and prices, taking these new policy measures as well as recently announced provincial measures into consideration.
The announcement is good for homeowners with a floating rate mortgage, as their debt servicing costs will remain the same. This comes at a time when many are worried about affordability if rates rise to fast. A recent nationwide survey, conducted by Ipsos on behalf of MNP – one of the largest personal insolvency practices in the country, found that more than 32 per cent of Canadians say they’re concerned rising interest rates could push them close to bankruptcy.
Maintaining rate was expected for now; Hikes to come soon
BMO Chief Economist Douglas Porter says the announcement was devoid of surprises. In a statement emailed to reporters, he said, “This statement gives zero sense of urgency for further rate hikes, and seems to fit in with our view that the Bank is on the sidelines until the second half of the year. While we currently look for 25 basis point hikes in July and October, that’s clearly dependent on how trade issues unfold in the months ahead.”
This is the second of eight interest rate announcements by the Bank of Canada this year. The expectation is the Bank will raise rates in 2018 as the future of NAFTA becomes clearer. But with caution of course, the Bank says, “While the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target.”
The next announcement is April 18, 2018 and at that time, the Bank will also release a Monetary Policy Report.