Interest Rates Stay at Status Quo in Bank of Canada May Announcement

The Bank of Canada has held its trend-setting Overnight Lending Rate at 1.75% for the sixth time in a row this month, as lingering economic risks such as softness in the oil sector, housing market, and exports, are reason to stick to status quo.

However, the central bank took a decidedly cheery tone in its announcement language, reinforcing policymakers’ beliefs that the Canadian economy will turn around in the second half of the year.

“The oil sector is beginning to recover as production increases and prices remain above recent lows,” the BoC states. “Meanwhile, housing market indicators point to a more stable national market, albeit with continued weakness in some regions.”

They also point to improvements in job growth as evidence that the sluggish conditions experienced during the first six months of the year were temporary, and that consumer spending and exports will continue to see improvement. Demand for condos and houses for sale is also anticipated to pick up across the country, further supporting the economy.

U.S.-China Trade Spat Creates Canadian Risk

However, there are still vulnerabilities present on a global scale, especially as trade tensions ramp up between China and the U.S. – Canada’s two largest trade partners. This “recent escalation of trade conflicts” is reason for continued caution, though a recent removal of U.S. tariffs on Canadian steel and aluminum will have a positive impact.

Inflation growth, which is the key metric the BoC uses when determining its direction on rates, remains on track, sticking close to its 2% target.

With these factors in mind, the BoC maintains its current stance on rates is warranted, though it’ll keep a “data-dependent” approach and will remain “especially attentive to developments in household spending, oil markets, and the global trade environment” when determining its next steps for monetary policy.

Rates to Stay Stable for Remainder of 2019 

However, while the BoC is keeping a positive outlook, analysts overwhelmingly do not expect that to translate into an interest rate hike.

Economist panels polled by Reuters and Bloomberg were both unanimous in expecting no change this month, and for the BoC to hold steady on rates for the remainder of 2019. According to their outlook, there will be no change until at least after the federal election this October and, should the economy continue to underwhelm, that change will be in the form of a rate cut. In fact, 40% of the Reuters economists believe that there will be at least on 0.25% cut before the end of 2020.

What Does This Mean for Your Mortgage Rate?

While slower economic performance can be cause for concern, it tends to usher in more favourable conditions for borrowers; one of the central bank’s roles is to stimulate the economy in the case of a downturn by keeping the cost of borrowing cheap.

With the BoC on hold for the foreseeable future, that translates to stable interest rates for variable mortgage holders, as Canada’s consumer banks take their pricing cues from the direction of the Overnight Lending Rate. Those with variable-rate mortgages or lines of credit will see no change to their monthly payments, or the proportion of their payments going toward their principal as a result.

It will also be likely that lenders will offer competitive variable-rate options, passing the discount down to borrowers. And, while the BoC rate does not directly impact prices for fixed mortgages, a more accommodative approach to monetary policy will influence the bond market, which lenders use to price their fixed offerings. As bond investors enjoy stable or lower interest rates (its helps preserve the value of their existing investments), yields will continue to drop, prompting the consumer banks to keep rates low.

The next Bank of Canada announcement will be on July 10, 2019, along with the release of the next Monetary Policy Report.

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.