Bank of Canada Update: Holding Its Benchmark Interest Rate


Bank of Canada Rate Update – December 7, 2016

As expected, the Bank of Canada is holding its benchmark interest rate at 0.5 per cent. The scheduled announcement today was in line with expectations.

“Following a very weak first half of 2016, growth in the third quarter rebounded strongly, but more moderate growth is anticipated in the fourth quarter,” said the Bank in a statement.

It also notes that Canadian inflation is slightly below what it had anticipated in large part because of lower food prices. Inflation is a key factor when making rate decisions.

Therefore, the Bank says the economic conditions are still not right for a rate hike as business investment and non-energy goods exports continue to disappoint.

On a positive note, the Bank did say the reason why growth was robust in the third quarter was because of the new Canada Child Benefit. It also noted that it is still unsure of how the new federal infrastructure spending will affect GDP.

Outside Our Border

Outside our border, it was mentioned that the global economy has strengthened, but persistent international uncertainty has continued to have a negative effect on business confidence and investment among Canada’s trading partners. As some may have expected, the results of the U.S. presidential election were recognized to have played a role in keeping rates low over here.

“Following the election in the United States, there has been a rapid backup in global bond yields, partly reflecting market anticipation of fiscal expansion in a U.S. economy that is near full capacity,” the Bank said. “Canadian yields have risen significantly in this context.”

Economists expect rates to remain at these near record lows for the foreseeable future. BMO chief economist Doug Porter told CBC News that he expects the central bank to stand firm on interest rates for some time to come.

“No doubt, the back-up in bond yields is unwelcome by the Bank,” Porter said of the decision, “but we judge that overall financial conditions in Canada are broadly unchanged since the October meeting.”

“Barring some massive shock, the Bank appears to be very comfortable staying on the sidelines for some time yet.”

The next Bank of Canada interest rate announcement is January 20th. But for now, all eyes are on the U.S. Federal Reserve. It is expected to raise rates at its next meeting scheduled for December 14th.

If the Fed does raise rates, Canada would be in a unique position if it decides to keep rates steady at its next meeting and not follow suite with the U.S.

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