Bank of Canada Holds Breath Amid U.S. Trade Talks

The Bank of Canada is holding its breath, waiting to see how trade negotiations and skirmishes play out below the American border. The central bank, which sets the trend for the variable cost of consumer borrowing, has opted to leave its Overnight Lending Rate at 0.5% in its March announcement, where is has remained since July 2015. The Bank Rate is correspondingly ¾% and the Deposit Rate is ¼%.

“The Bank’s Governing Council remains attentive to the impact of significant uncertainties weighing on the outlook and continues to monitor risks outlined in the January MPR,” reads the BoC’s statement. “In this context Governing Council judges that the current stance of monetary policy is still appropriate and maintains the target for the overnight rate at ½%.”

These “significant uncertainties” refer in large part to the actions of U.S. President Donald Trump, who has thrown a number of Canada’s key trade agreements info flux. Following his abandonment of TPP, unease lingers over NAFTA’s fate and pending changes to the American corporate tax rate – which would be competitively painful for Canadian trade and hinder business investment.

Related Read: No Interest Rate Change Announced as Bank of Canada Awaits Trump Policies

Stephen Poloz has made it clear he won’t hesitate to cut rates should Trump’s measures be unfavourable to Canada. “Should any of those downside risks materialize and put our inflation target at risk, then we would have the room to manoeuvre – yes, a rate cut remains on the table and it would remain the table as those downside risks were still present,” he stated to the press following January’s interest rate announcement. “In our discussions, Governing Council was particularly concerned about the ramifications of the U.S. trade policy, because it is so fundamental to the Canadian economy.”

However, until the extent of those ramifications become clear, Poloz isn’t willing to squander the BoC’s limited tools with a premature rate cut.

Related Read: Monthly Real Estate News Recap: January

Some Growth – But Don’t Get Too Excited

Despite unease over trade, Canada’s economy saw some positive change with growth mainly in line with what the BoC forecasted in its January Monetary Policy Report. Fourth quarter growth was stronger than expected due to healthy consumption and powerful housing market. CPI inflation rose to 2.1% in January as energy prices improved and new carbon pricing measures took effect, though the boost will only be temporary. Jobs strengthened, though incomes and hours worked didn’t match pace. Exports still struggled, due to competitive challenges, while bond yields and the Canadian dollar are expected to stay at status quo.

Canada’s economy is expected to grow 2.1% in each 2017 and 2018, with full capacity achieved by 2018, according to its MPR.

BMO Says Rate Cut Not Likely

However, while the BoC keeps its cautious wait-and-see stance, recent comments from the Bank of Montreal say the chance of a rate cut is less likely than widely believed. In a recent report from BMO Capital Markets, senior economist Benjamin Reitzes says the economy is performing better than expected, which may lead to a bond sell off – a change that could make it tough for Poloz to lean towards a cut.

“It’s going to the bard for Poloz to sound consistently dovish when the economy is evolving as expected, or better,” he writes. “The change of tone won’t come next week (in reference to today’s announcement), but it could come as soon as April.”

What Does This Mean for Your Mortgage Rate?

No movement from the BoC means those with variable loans – including variable-rate mortgages – won’t see any change to their interest rates or overall amortization. If the BoC does follow through with a cut, it will mean these variable borrowers could enjoy lower rates this year – but just like our nation’s monetary policymakers, we’ll just have to wait and see how U.S. trade talks play out.

About Penelope Graham

Penelope Graham is the Managing Editor at Zoocasa, and has over a decade of experience covering real estate, mortgage, and personal finance topics. Her commentary on the housing market is frequently featured on both national and local media outlets including BNN Bloomberg, CBC, The Toronto Star, National Post, and The Huffington Post. When not keeping an eye on Toronto's hot housing market, she can be found brunching in one of the city's many vibrant neighbourhoods, travelling abroad, or in the dance studio.

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