April 18, 2018

Bank of Canada Holds April Rate Despite Pressure to Hike

It’ll be another month of no rate change for borrowers, as the Bank of Canada maintained its trend-setting Overnight Lending Rate at 1.25 per cent for the second consecutive time.

While economists widely anticipated this would be the case, economic pressure has been mounting on the central bank to make an upward move. Inflation and GDP are both on track to exceed their 2-per-cent targets in the near term, and the U.S. Federal Reserve hiked its own interest rate to 1.75 per cent in March – the highest since 2008. Positive developments regarding NAFTA, and an improved Canadian business outlook could also pave the way for the BoC to up rates.

The rate was increased to its current 1.25 per cent in January, following a hike to 1 per cent in September 2017.

A Stronger Economy Calls for Higher Rates

The improving economy has led to mixed signals from the BoC, which traditionally follows in lock-step with its U.S. counterpart’s monetary policy. However, while today’s announcement acknowledges that “higher interest rates will be warranted over time”, too many uncertainties remain from a geopolitical and trade perspective to make a move now.

And, while the BoC calls for robust growth in the medium term, with GDP to rise 2 per cent this year and next, and 1.8 per cent in 2020, economic performance in the first quarter of 2018 has been softer than expected, mainly due to a slower housing market and exports industry.

“Slower economic growth in the first quarter primarily reflects weakness in two areas. Housing markets responded to new mortgage guidelines and other policy measures by pulling forward transactions to late 2017,” the BoC states in its announcement. “Exports also faltered, partly owing to transportation bottlenecks. Some of the weakness in housing and exports is expected to be unwound as 2018 progresses.”

The Bank also continues to monitor the impact higher interest rates will have on borrowers and the economy as it evolves its economic policy. “In this context, Governing Council will remain cautious with respect to future policy adjustments, guided by incoming data,” it states.

When Will Rates Rise?

The general consensus is that the BoC’s cautious stance will be short lived, with one or more rate hikes to come over the coming quarters, though lenders aren’t in agreeance on how soon.

In a note to investors, Scotiabank indicated a hike won’t occur until the third quarter of this year, while a report from Bank of America Merrill Lynch Global Research expects one as soon as May, with two more in October and December, following further upward movement from the U.S. Federal Reserve.

What Does This Mean for Borrowers?

Because the Bank of Canada’s Overnight Lending Rate is used by banks to set their own Prime rates, no movement in today’s announcement means variable consumer lending rates shouldn’t fluctuate this month. This includes all variable-rate mortgages, HELOCs, and LOC borrowing products. However, with anticipated increases just a few months away, it’s important that borrowers understand how their monthly payments or contribution to their principal debt will change.

Related Read: Should Borrowers Go Fixed or Variable as Rates Rise?

Fixed mortgage borrowers who are currently locked into a term will not be immediately impacted by rising BoC interest rates, but could be affected at renewal time should the overall borrowing environment be more expensive; rising central bank rates can also impact long-term bond yields, which in turn influence the banks’ fixed cost of borrowing.