The Bank of Canada has maintained the Overnight Lending Rate at 1 per cent once again – and if you respond to that news with a “so what”, you’re certainly not alone.
After all, the neutral stance by the country’s top financial power stalks the status quo, a rate that’s gone unchanged for four solid years, marking the longest stint of neutrality since the 1950s. Retail banks – like the ones that house your hard-earned funds – use the benchmark to set their Prime lending rate, which can affect the interest you pay on things like credit card debt and mortgages.
However, that’s not to say there are important nuances underwritten in today’s announcement – for one, its neutral stance shows that BoC Governor Stephen Poloz and Co. have no plans to raise or lower rates any time soon.
Here are the key influences on Poloz’s neutrality:
Inflation: Close, But No Cigar
Inflation is close enough to the 2 per cent target predicted by the BoC, though the boost from 0.7 per cent last October to 2.4 per cent in June has since stifled slightly, falling to 2.1 per cent in July. Poloz attributes the temporary boost to a short-lived increase in energy prices and a weaker Canadian dollar, rather than hard, sustained economic improvement. Inadvertently, the dollar strengthened 0.3 per cent to C$1.0892 per USD shortly after the announcement Wednesday morning.
Global Economy: Highs and Lows
There were few surprises from global economic influences. Europe’s recovery is being dogged by the crisis in Ukraine while stateside, the U.S. gets back on track with its financial recovery.
“The economy clearly perked up in recent months, pulled along in the slipstream of an improving U.S. backdrop,” Bank of Montreal chief economist Doug Porter told the CBC following the news.
In a release with the announcement, the BoC pointed out that global financial conditions continue to be “stimulative” with longer-term bond yields – the amount of return an investor will realize on a bond – easing even further, as the often do when markets move towards “safer” investments.
Exports: In For the Long Haul
Canadian exports pulled ahead in the second quarter of 2014 after a sleepy winter, on the back of stronger U.S. investment spending. Between April and June, shipments abroad climbed an annualized 17.8 per cent.
The BoC gave a nod to recovery in the export sector but pointed out that “this pickup will need to be sustained before it will translate into higher business investment and hiring.”
Housing Sector: Still a Power Player
Canada’s housing sector has performed stronger than the BoC expected but fears about a potential meltdown in the sphere are far from tempered.
In mid-August, a survey by Reuters showed analysts suspect house prices to rise more than initially expected with the cost of Canadian homes appreciate 5 per cent this year followed by a 2 per cent rise in 2015, leading to a doubling in value over the past 10 years.
Debt Is… Still Depressing
The biggest risk and a major catalyst behind the BoC’s neutrality towards the overnight lending rate is the level of household debt, which stands at a national average ratio of 1.5 times vs. income. As the BoC begins raising benchmark interest rates, mortgage costs increases could add to that debt. According to Stats Canada, household debt hit a record high of 164.1 per cent in the third quarter of 2013 before tapering off slightly in the following quarters.
Although the bank plans to remain neutral going forward, Canadian economists all seem to hold the same conclusion that the BoC will likely raise the overnight lending rate mid-2015.