Bank of Canada Backs Away from Rate Hike Strategy in March Announcement

The Bank of Canada (BoC) officially turned dovish in today’s scheduled rate announcement, keeping its trend-setting Overnight Lending Rate untouched at 1.75%, and explicitly stating lower interest rates will continue to be necessary in the current economic climate.

“Governing Council judges that the outlook continues to warrant a policy interest rate that is below its neutral range,” states the BoC’s release. “Given the mixed picture that the data present, it will take time to gauge the persistence of below-potential growth and the implications for the inflation outlook. With the increased uncertainty about the timing of future rate increases, Governing Council will be watching closely developments in household spending, oil markets, and general trade policy.”

Economic Growth is Lower Than Expected

The central bank says its stance was influenced by a surprising report issued by Statistics Canada last week, that revealed the economy grew by only 0.1% in the last quarter of 2018. This is despite already forecasting a temporary downturn due to challenges in the oil patch, softer housing market, and less household spending.

“However,” the BoC points out, “the slowdown in the fourth quarter was sharper and more broadly based.” This has led the Bank to predict economic growth will fall short of its previous forecast for the first half of 2019, following its pace of 1.8% over the course of last year. It expects inflation to remain below its 2% target as lower energy prices persist, and also points to global economic risks that have prompted other central banks to loosen monetary policy, including the U.S. Federal Reserve.

International trade tensions, and particularly the unfolding U.S.-China trade war, remain top external concerns. The BoC’s next Monetary Policy Report forecast will be released along with its April 24th rate announcement.

A Slower Housing Market is Also a Factor

Another cause for concern is slowing activity in the housing market; the BoC has stated it will keep a close eye on how borrowers are impacted by the mortgage qualification rules introduced last year. So far, they’ve proven to take a bite out of demand in the nation’s biggest markets; February numbers from the Toronto and Vancouver local real estate boards reveal sales remain subdued moving into the year as a result of the stress test. It has been particularly painful for houses for sale in the west coast city, as detached prices have plunged 10% last month.

What’s to Come for Future Interest Rates?

That the BoC would take a softer stance on the economy in its March announcement was widely expected by analysts, especially following a speech made Governor Stephen Poloz in February that indicated his plan to hike rates this year had become “highly uncertain”. 

It’s a turnaround from the hawkish stance the BoC has taken over the last two years, when it hiked rates five times from 0.7% to the current 1.75% as part of efforts to reach a “neutral” interest rate (between 2.5 – 3.5%). Hitting such a range would indicate that the economy is performing at capacity and that rate stimulation is no longer needed – but the recent crop of flagging economic data have thrown that strategy into flux. 

In fact, according to panels of economists recently polled by Bloomberg and Reuters, it’s expected the BoC will hold its rate all the way until December of this year, though the jury is still out on whether it will hike or cut it at that time. Previously, it was widely expected two rate hikes would occur in 2019.

What Does This Mean for Your Mortgage Rate?

Because the Bank of Canada’s Overnight Lending Rate directly influences the cost of variable consumer loans, those with variable-rate mortgages can rest easy knowing their rate is stable – for now. 

However, having such forward-looking insight can be a benefit for those deciding whether or not to take out a variable mortgage, or those weighing their options at renewal time. As a rate hike can translate into a higher monthly mortgage payment, or more of your payment going toward interest and less toward your principal, it’s important to consider how this risk factor may affect your budget. Conversely, should variable rates be poised to be lowered over the medium term, that can result to more money saved on your mortgage. It’s a great idea to connect with a mortgage expert to discuss these options when the future of interest rates may be unclear.

About Penelope Graham

Penelope Graham is the Managing Editor at Zoocasa. A born-and-bred Torontonian and quintessential millennial, she has over a decade of experience covering real estate, lifestyle and personal finance topics. 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.