Economists across the nation can’t say they’re surprised as the Bank of Canada rate remained unchanged at one per cent in this morning’s announcement. The rate, which has remained historically low since September 2010 (the longest rate hold since the 1950s, according to the Financial Post), means the cost of borrowing will remain low for consumer products such as mortgages and loans.
Bank of Canada Rate Sticking to Stimulus Conditions
Given current economic conditions, both Canadian and on the international scale, a rate hike this month was truly seen as unlikely. According to the statement released this morning by the Bank of Canada, there are three main factors behind the rate hold:
U.S. Fiscal Cliff Fears
Time is ticking away for Barack Obama and American policy makers to draft a solution to one of the largest economic threats facing North America. Common ground must be reached on key issues such as middle class taxes and spending cuts before December 31, or the U.S. will plunge into recession – likely taking Canada along with it. As long as uncertainty revolves around the world’s largest economy, it’s no surprise Canada is pulling up its bootstraps and holding its breath.
A Mediterranean Fiscal Mess
The EU Crisis refuses to fade, with Greece scrambling to avoid bankruptcy, persistent unemployment across the continent, and collapsed budget talks among EU leaders that won’t resume until the new year. While the BoC notes that “Global financial conditions remain stimulative,” we’re still very much vulnerable to “major shocks from the U.S. or Europe.”
Slower Than Expected Growth at Home
Plans for Canadian economic recovery experienced a setback when it was revealed GDP had grown at a rate of only 0.6 per cent over the last quarter. While the BoC names a lagging energy sector as the main culprit, and anticipates the pace will pick up next year due to consumption and business investment, it’s enough for stimulative conditions to remain for the time being.
Enjoy the Low Rates – While They Last
While this month proved anticlimactic, expect the new year to ring in some economic drama, with the next announcement slated for January 23. At that point the fiscal cliff will have come and gone – and we’ll know whether we’ve fallen off it. While we could be reacting to an American recession, it’s also possible that tentative growth predictions will be setting the stage for a rate hike. Here are a few factors that could spell the end for super low rates:
Slowing Household Credit
While our household debt levels will actually increase, the Bank of Canada anticipates that the growth of household credit will actually slow – but it’s too early at this point to know if such activity will be sustained.
Exports to Rebound
Canada’s long-suffering export industry is also expected to make small gains in 2013. The past year has been dire for the industry, as safe-haven status kept the Canadian dollar strong – and foreign demand dropping off .
Hitting Target for Inflation
The Bank of Canada has indicated two per cent to be the magic number for inflation levels. It’s expected that the economy will hit this target in 2013, bringing about a rate increase in tandem with “modest withdrawal of monetary policy stimulus”.
Change is Coming – But it Will be Gradual
While it’s inevitable that what goes down must eventually come up, the Bank of Canada has includes the following statement in their December 4 announcement to reassure markets and borrowers alike: “The timing and degree of any such withdrawal will be weighed carefully against global and domestic developments, including the evolution of imbalances in the household sector.”