The Bank of Canada announced this morning, October 19, 2010, that it will keep its target for the overnight rate which is its key lending rate at 1.00%. This time around the decision to not increase interest rates for a third straight time was widely expected, as economic news at home and around the world has worsened over the past few months.
The Central Bank reported that the global economic recovery is ‘entering a new phase’. Meaning that the temporary factors that was supporting economic growth, eg. government financial stimulus, had run its course and that this would start to be removed. As a result, although the private sector will eventually be able to lead the economic recovery, the current unemployment statistics and reduction of high debt levels will slow down growth, this will be especially true in the US.
As a result, the Bank downgraded its growth prospects for the Canadian economy since its last Monetary Policy Report in July 2010, as follows:
- 2010: 3.0 per cent
- 2011: 2.3 per cent
- 2012: 2.6 per cent
The announcement identified a slower global recovery and ‘subdued profile’ for household spending as reasons why Canada’s growth will slow. They expect the housing market to continue to decline and as interest rates will increase in the future, household debt will become more of an issue. Household spending will slow down to the pace of income growth. The Canadian economic recovery will move away from being driven by government and household spending to businesses. Come on RIM and Potash!
Inflation, which is the Bank of Canada’s main concern, is below their July projection, and they believe it will remain at under 2% through 2012.
Despite not raising interest rates there was a warning that this announcement leaves ‘considerable monetary stimulus in place’ meaning interest rates are lower than they should be. However, taking into account all the factors any further interest rates hikes would need to be carefully considered. This could be interpreted that Governor Mark Carney and the Bank of Canada may rest their trigger fingers for the rest of the year and wait and see how things look in early 2011 before increasing interest rates again.
This is great news for Canadians with variable mortgage rates as your payments will stay steady for another few months, but keep in mind, these rates are abnormally low, and they will be increasing in the future. Make sure to plan ahead and be ready for when this starts happening.