The Bank of Canada has started the new decade with more of the same, choosing to hold its trend-setting Overnight Lending Rate at 1.75% as it did throughout 2019. It is the 10th rate announcement in a row without movement, a trend that has been widely expected by economists to continue into the new year.
However, while the BoC was able to hold status quo on interest rates last year due to strong domestic economic stability, its language in today’s announcement suggests this has started to weaken. The central bank acknowledges that while the global economy has steadied – progress on a new NAFTA and improving US-China tariff developments have helped settle the waters – new developments of middle-eastern unease could pose a threat to markets. “There remains a high degree of uncertainty and geopolitical tensions have re-emerged with tragic consequences,” the BoC states in its announcement.
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Slightly Slower Economic Conditions to Start the New Year
While economic conditions continue to be strong at home, there are a few early cracks that, should they widen, give the Bank the impetus it needs to potentially cut rates this year. Some growth trends are proving to be weaker than what was forecasted in the Bank’s last October forecast; exports flattened toward the end of the year along with business investment, while there was less job creation and consumer spending than expected.
However, the housing market continues to strongly perform, with demand for condos and houses for sale up substantially from the beginning of 2019. In all, the BoC expects the fourth quarter of 2019 to post 0.3% growth, with 1.3% to come in Q1 of this year; on a global scale, the economy will grow 3% in 2020, and 3.25% in 2021, while Canada’s GDP will be up 1.6% this year, and 2% next.
Some of the factors behind the slightly slower economy include employment strikes, poor weather, and inventory adjustments. However, the BoC concedes that it could also be that slower global economic conditions are impacting Canada more than previously expected. As well – in what’s a good news story for bank accounts and debt levels. but not so much for retailers – Canadians improved their saving habits last year.
Economic Growth to be Slow but Steady
With this in mind, the BoC still expects modest growth looking forward into 2020 – business investment and exports may be subdued but will continue to chug along, while pickup in household spending, population, and income growth will help prop up the economy, along with the recent federal income tax cut.
While it still remains to be seen whether a rate cut could be on the horizon his year, the BoC has indicated its keeping a close eye on the data. “In determining the future path for the Bank’s policy interest rate, Governing Council will be watching closely to see if the recent slowdown in growth is more persistent than forecast,” it states. “In assessing incoming data, the Bank of will paying particular attention to developments in consumer spending, the housing market, and business investments.”
What Does This Mean for Mortgage Borrowers?
The Bank of Canada’s trend-setting interest rate – also known as its Overnight Lending Rate – is used by the nation’s consumer banks to set their own variable cost of borrowing. This means, when the BoC cuts or hikes its rate, the banks will do the same regarding their variable mortgage and line of credit rates.
As there was no change announced in today’s rate announcement, those holding variable mortgages will see no change in the near term to their monthly payments. As well, the pricing environment will remain stable for borrowers looking to apply for brand new variable mortgages, as well as those looking to renew or refinance their existing home financing.
The next Bank of Canada announcement will take place on March 4, 2020.
