The Bank of Canada announced this morning it is leaving its benchmark rate unchanged at one per cent. This comes after the Bank raised rates in two consecutive announcements this past July and September.
Forecasters were widely expecting this. Most economists polled before the announcement believed the Bank would not make an interest rate hat-trick by raising its target overnight rate for a third time in a row.
The Bank seems satisfied with economic growth in Canada. Inflation, which is the Bank’s core mandate, is expected to reach two per cent in the second half of 2018. This would bring the Bank closer to its inflation target.
In a statement released shortly after the announcement, the Bank relayed its content in the current state of Canada’s economy, but with more of a cautious outlook than in its last announcement.
“Canada’s economic growth in the second quarter was stronger than expected, and was more broad-based across regions and sectors. Growth is expected to moderate to a more sustainable pace in the second half of 2017 and remain close to potential over the next two years,” the Bank said. “While less monetary policy stimulus will likely be required over time, Governing Council will be cautious in making future adjustments to the policy rate.”
Reasons for rate hold: Household debt, NAFTA and new OSFI rules
The Bank says the economy is operating at its full potential, which usually signals conditions for a rate hike. But, household debt continues to be a big concern, and the Banks says that is one of the reasons it did not raise rates this time.
“Housing and consumption are forecast to slow in light of policy changes affecting housing markets and higher interest rates. Because of high debt levels, household spending is likely more sensitive to interest rates than in the past,” the Bank said.
The Bank also listed changes in the North American Free Trade Agreement (NAFTA) as a potential risk:
“This outlook remains subject to substantial uncertainty about geopolitical developments and fiscal and trade policies, notably the renegotiation of the North American Free Trade Agreement.”
BMO Bank of Montreal Chief Economist Doug Porter agrees that an unfavourable turn in NAFTA negotiations with the U.S. factored into the Bank’s decision, as well as new stricter rules on mortgages imposed recently by the Office of the Superintendent of Financial Institutions Canada (OSFI). Both happened after the last interest rate announcement in September, when the Bank increased its rate by 25 basis points.
“We now believe that the Bank will pause for longer, given the greater uncertainty over NAFTA, as well as the recent steps taken by OSFI to cool the housing market. The Bank’s more cautious tone supports that view,” said Porter in a note. “Accordingly, we have pushed back the next hike to March (from January), and now expect three hikes next year (down from four). Naturally, the actual timing will depend critically on the incoming data as well as the fate of NAFTA negotiations.”
Hold is good news as Canadians already feel pinched by previous hikes
The Bank of Canada rate decision usually affects the prime rate at commercial banks, which is expected to stay unchanged. And anyone with a floating loan or a variable rate mortgage should be happy to hear about a stay in interest rate hikes as well. The last two rate hikes did increase interest payments for these borrowers, and debt servicing will become more difficult for those in a record amount of debt.
In a recent Ipsos poll conducted by MNP LTD., one third of respondents said they’re already feeling the impact of the past two rate hikes, and 40 per cent said they’ll be in financial trouble if interest rates increased again.
As mentioned before, household debt is a concern of the Bank’s, and the MNP survey supports this concern. The survey found that the average household now has $149 less at the end of the month after bill and debt payments since June, thanks to the rate increases. Over 40 per cent of households claimed they are already within $200 of not being able to pay their bills, and almost one third (28 per cent) worry future increases could push them toward bankruptcy.
And though forecasters like Porter don’t predict another hike for months, borrowers should start to financially prepare themselves in the event of another increase within the first quarter of 2018.
The next rate announcement is scheduled for Dec. 6, 2017.