April 23, 2015

Bank of Canada Rate Announcement: Less Atrocious Times Ahead?

By Penelope Graham, RateSupermarket.ca, MoneyWise

So, Mr. Poloz – is it all uphill from here? Today’s Bank of Canada interest rate announcement has a decidedly optimistic tone, despite dour news for the economy’s first quarter. In the announcement, which did not call for any change to the trendsetting Overnight Lending Rate (currently 0.75 per cent), the Bank states that while the impact of oil has led to a “very weak” Q1, the timeline for economic capacity remains on track for the end of 2016, and that current monetary policy stimulus remains “appropriate”.

Slashed Estimates for Q1… But No Surprises

The impact of dropping oil prices, while still being fully realized, essentially “stalled” the economy in Q1; the Bank cut its growth forecast for the quarter to zero from 1.5 per cent. However, despite derailed growth estimates, the Bank believes the fallout, though front loaded, will not be larger than expected.

“The ultimate size of this impact will need to be monitored closely,” the Bank states.

However, while experts anticipated less-than-stellar first quarter performance, it wasn’t expected the bank would move to cut rates again at this time. Says Kelvin Mangaroo, former President of RateSupermarket.ca and member of the Mortgage Rate Outlook Panel, “Despite Stephen Poloz’s declarations of our economy’s “atrocious” state, communication from the Bank has consistently indicated conditions will improve this quarter.” He adds that the central bank isn’t in a hurry to use up what measures they do have access to too soon. “Regardless if Poloz still backs that forecast, it’s unlikely the Bank will squander the monetary policy tools at their disposal so soon after January’s rate cut.”

A Less “Atrocious” Second Quarter

The Bank states that an economic silver lining can be found in a growing non-energy exports sector driven by improved U.S. demand in the second quarter, increased investment and improving labour markets: Statistics Canada reported 28,700 new jobs were added to the workforce in March, though most of them part-time. States the Bank, “As the impact of the oil shock on growth starts to dissipate, this natural sequence is expected to re-emerge as the dominant trend around mid-year.”

The Bank expects real GDP to rebound by 1.9 per cent in 2015 (down from the previously forecast 2.1 and last year’s 2.5), 2.5 per cent in 2016, and 2.0 per cent in 2017.

For now, total Consumer Price Inflation hovers around 1 per cent due to lower energy prices, while core inflation remains close to two per cent, as sector-specific improvements and lower Canadian dollar “offset the disinflationary forces from slack in the economy.”

Monetary Policy Stimulus: Everybody’s Doing It

Global growth remains on track with the Bank’s January projections, expected to grow an average of 3.5 per cent year over year from 2015 to 2017. This is due to the monetary stimulus measures taken out by a number of central banks around the world. “Many central banks have eased monetary policies in recent months to counter persistent slack and low inflation…”, states the release. “At the same time, economies continue to adjust to lower oil prices, which have fluctuated at or below levels assumed in the January MPR.”

What Does This Mean for Your Mortgage?

Nothing, if you’re a variable-rate mortgage borrower: no change to the Overnight Lending Rate means the banks will stick to status quo on their Prime pricing (currently at 2.85 per cent). However, we’re in the midst of one of the most competitive mortgage seasons ever – both fixed and variable rate shoppers have access to some of the lowest pricing ever seen. Click here to view the best rates in your region.