October 25, 2017

Bank of Canada Holds October Rate Following New Mortgage Rules

The Bank of Canada has hiked its trend setting interest rate twice this past year and – a mere month ago – was strongly expected to do so in October, too. However, slower-than-expected jobs numbers and a spate of new mortgage rules seem to have put those ambitions on hold, as the central bank left its trend-setting rate at 1 per cent in today’s announcement.

Mortgage Rules Take Bite Out of Rate Hike

While a Bloomberg poll reveals 53 per cent of economists anticipated an October hike as early as four weeks ago, just 18 per cent stuck to their forecast following the reveal of new mortgage regulations from OSFI that will make qualification tougher for more borrowers. As a result, the BoC expects real estate activity – a main contributor to the economy – will slow.

“Housing and consumption are forecast to slow in light of policy changes affecting housing markets and higher interest rates,” states the BoC in their release. “Because of high debt levels, household spending is likely more sensitive to interest rates than in the past.”

That the BoC has held status quo is a source of relief for beleaguered new mortgage applicants, who will face an additional two per cent qualification hurdle starting in January. Many housing experts have expressed concern that, combined with a rising interest rate environment, the changes will have deeper consequences for the housing market than policy makers intend.

According to a recent Ipsos poll conducted for MNP, a full 40 per cent of respondents said they would run into financial issues should rates rise, with one in three already feeling squeezed by today’s higher cost of borrowing.

Returning to a “Wait and See” Approach

It appears the BoC has reverted to a “wait and see” approach, observing how the changes are absorbed by households and overall economy before pumping interest rates again.

“While less monetary policy stimulus will likely be required over time, Governing Council will be cautious in making future adjustments to the policy rate,” states the BoC. “In particular, the Bank will be guided by incoming data to assess the sensitivity of the economy to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.”

Inflation to Improve This Year and Next

From an economic perspective, a stronger Loonie and inflation growth have paved the way for the BoC to take a more hawkish approach to its monetary policy, which drove its decision to hike rates this past July and September. Those increases effectively removed all of the safeguards put in place by the Bank to help the economy weather lower oil prices in 2015.

It reports inflation performed well in October, in line with the forecast made in the July Monetary Policy Report, due to stronger spending and gasoline prices. It’s expected inflation will hit its 2-per-cent target in the second half of 2018, with domestic GDP expanding by 3.1 per cent this year, and 2.1 and 1.5 per cent in 2018 and 2019, respectively.

The labour market continues to underperform, with wages remaining stubbornly low, which is dragging down economic growth despite recovering inflation.

Global growth is expected to grow at an average of 3.5 per cent over the next two years, though uncertainty over the future of the North American Free Trade Act casts doubt in the near term.

“Based on this outlook and the risks and uncertainties identified in today’s MPR, Governing Council judges that the current stance of monetary policy is appropriate,” states the BoC.

The next scheduled central bank interest rate announcement will be on December 6; currently, forecasts say there’s a less-than-30-per-cent chance of another hike before the end of the year.