Bank of Canada Maintains Key Interest Rate – But Removes Conditional Commitment

The Bank of Canada had their April rate announcement today and reported that they will be keeping their key interest rate, the target for the overnight rate steady at 0.25%.

Although this doesn’t come as a surprise, the most alarming piece of news in this announcement is that they have removed the conditional commitment to hold rates at their current level until the 2nd quarter of 2010 (July 2010). This is a big change as commitment has been in place since April 2009 and was introduce to provide guidance during the global economic crisis. This was an exceptional move and many industry observers believed they would not increase interest rates until July, because their conditional commitment was taken by the market as a promise, and if they failed to hold that promise, they’d never be able to provide this kind of guidance again – as no one would be sure if they’d stick to it. See our article on the “Two Camps“.

So this tells us that the economic recovery and inflation are climbing quicker than expected and the Bank of Canada felt compelled to make this change. This signals that interest rates will start rising at the next rate announcement meeting on June 1, 2010. As this is the main rate that influences Canadian variable rates, this means that variable rates could also start rising in June from their current levels at around 1.70%.

The press release highlighted the following reasons for removing the commitment:

  • Global economic growth has been somewhat stronger than projected
  • Exceptional stimulus from monetary and fiscal policies continues to provide important support in many countries
  • Considerable uncertainty remains about the durability of the global recovery

While in Canada:

  • The economic recovery is proceeding somewhat more rapidly than the Bank had projected
  • The profile for growth is more front-loaded expected
  • The Bank now projects that the economy will grow by: 3.7% in 2010, before slowing to 3.1% in 2011 and 1.9% in 2012.Positive signs:
  • Stronger near-term global growth
  • Very strong housing activity in Canada
  • Policy stimulus resulted in more expenditures being brought forward in late 2009 and early 2010 than expected
  • Negative signs:
  • The persistent strength of the Canadian dollar
  • Canada’s poor relative productivity performance, and the low absolute level of U.S. demand will continue to act as significant drags on economic activity in Canada
  • The Bank also said that they expect the economy to fully recover by Q2 2010, and that inflation will remain somewhat elevated above their target 2% rate, but will return below that lever in the 2nd half of 2011.If you are in the market for a mortgage now or will be looking in the next few months, check out our Rate Hike Action Plan for Canadian Consumers that provides some tips on how to prepare and look for a mortgage while interest rates are increasing.

Related Topics

Economic News / Mortgage News / Mortgages

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