The Bank of Canada announced this morning that interest rates will remain unchanged for the 11th consecutive time over the past 15 months. The last time the BOC made a change to the overnight lending rate was in September 2010 with a moderate increase of 0.25 per cent.
The overnight rate currently sits at 1 per cent. The Bank Rate is 1.25 per cent and the deposit rate is 0.75 per cent.
The news is really no news at all, given that nearly all industry professionals and top economists were anticipating no change. But what should be of interest to consumers is the justification behind the decision. Here’s why the Bank of Canada is keeping interest rates where they are.
- The outlook for the global economy is getting worse.
- The recession in Europe is expected to be deeper and last longer than originally anticipated.
- The BOC was coy in suggesting they had faith Europe could get a handle on the situation: “although this assumption is clearly subject to downside risks”.
- The U.S. grew more than expected at the end of 2011, although this is not likely to last.
- The U.S. recovery will be more modest going forward due to continued household deleveraging and negative effects from Europe.
At Home in Canada
- When it comes to the Canadian economy, little has changed.
- It is estimated that GDP grew by 2.4 per cent in 2011 and is expected to grow by 2.0 per cent in 2012 and 2.8 per cent in 2013.
- Similarly to the U.S., we experienced slightly better growth in the second half of 2011 than anticipated, which is expected to be more modest going forward.
- Little is expected from net exports in 2012, due to moderate foreign demand, increased competition and a strong Canadian dollar.
- In 2012 inflation should remain level.
- Total and core inflation is expected to reach 2 per cent by the third quarter of 2013.
- The BOC recognizes that several significant upside and downside risks are prevalent in the inflation outlook for Canada, but they believe they have a handle on the risks and will be able to maintain their key mandate of keeping inflation under 2 per cent.
- With inflation in check there is little reason to believe that we will see a rate increase any time in the near future.
Consumer Debt Levels
One of the more worrying comments made by the Bank of Canada at today’s announcement was their forecast for consumer debt levels. With rates near all time lows more and more Canadians are taking advantage of the very favourable financing conditions. This is expected to continue and grow.
“Household expenditures are expected to remain high relative to GDP and the ratio of household debt to income is projected to rise further.” says the BOC.
A Note of Caution to All Home Owners
Today’s announcement means that your bank’s Prime lending rate will not change, which in turn means that variable mortgage rates will not change. If you are on a variable rate mortgage, take advantage of this low rate environment and pay down more of your mortgage principal now. You will be glad you did when rates increase in the next few years.