No Change for April Bank of Canada Rate Despite Stronger Economy

Economic growth has been stronger than expected in Canada and on the global scale, but the Bank of Canada isn’t relenting from its “wait and see” approach. The central bank has opted to leave its trend-setting Overnight Rate, which sets the Prime rate offered by consumer banks, at 0.5% in its April announcement, where it has been since July 2015. The Bank Rate is correspondingly 3/4%, and the deposit rate is ¼%.

An Improving Economic Picture

The Canadian economy has improved at a faster pace than forecasted by the BoC in its January Monetary Policy Report, getting an early-year boost from recovery in the oil and gas sector and consumer spending prompted by the Canada Child Benefit. Residential investment – aka Canada’s hot real estate market – was also stronger than expected. The bank calls for Canadian GDP growth of 2.5% this year, and below 2% through 2019, closing the economic output gap by 2018 – slightly sooner than previously forecast. CPI inflation, a mixed basket of goods the BoC used to use to gauge economic strength, has hit its target of 2%. Global GDP is expected to increase from 3 ¼% to 3 ½% through 2017 to 2019.

Bank of Canada Still Has Cause for Caution

Combined with improving conditions south of the border., and a corresponding interest rate hike by the U.S. Federal Reserve in March, analysts mused the BoC may start leaning toward increasing interest rates in Canada – but that’s not the case yet, as the bank’s Governing Council point to lingering negative factors that justify keeping the cost of borrowing low.

The bank warns the upticks seen in the energy industry will be temporary, and that exports continue to be battered by competitive factors. While employment has enjoyed a recent surge, positions are mostly part time and low wage. Businesses have also been slow to increase their spending, remaining “well below what could be expected” at this stage in economic recovery. “Accordingly, while the recent rebound in GDP is encouraging, it is too early to conclude that the economy is on a sustainable growth path,” reads the BoC’s statement.

Housing Market Warnings in the MPR

The bank also alluded to the potential cooling impact of anticipated housing market rules, expecting residential investment to slow over the next few years. “As in the January report, the Bank expects changes to the federal government’s housing finance policy to continue to dampen housing activity,” it wrote in the April Monetary Policy Report, adding that rising fixed mortgage rates will also impact housing demand. “In addition, the housing market is anticipated to slow somewhat in light of elevated household debt and higher longer-term borrowing costs, resulting from the projected gradual rise in global long-term yields.”

The BoC also issued a word of warning for the Golden Horseshoe housing market, which it says is showing evidence of speculative activity. “Price growth in the GTA has accelerated and seems to have entered a phase in which speculation is playing a larger role,” it writes.

Still Waiting on Trump Policies

The BoC also hasn’t been shy to point to existing “uncertainties” – aka the potential impact of U.S. President Donald Trump’s pending trade and business tax policies – as a reason for staying at status quo. As it’s still unknown what form those policies may take, the BoC needs to be prudent about keeping a few monetary policy tricks up its sleeve to offset any economic fallout, despite mounting evidence that the economy could withstand higher rates.

Related Read: Bank of Canada Holds Break on U.S. Trade Policies

“The Bank’s Governing Council acknowledges the strength of recent data, some of which is temporary, and is mindful of the significant uncertainties weighing on the outlook,” it states. “In this context, Governing Council judges that the current stance of monetary policy is still appropriate and maintains the target for overnight rate at ½%.”

What Does This Mean for Your Mortgage Rate?

The BoC’s Overnight Lending Rate is used as a base for consumer lenders’ Prime interest rates, meaning variable loans – including variable-rate mortgage rates – rise and fall when the BoC makes a change. The bank sticking to its current rate for now means there is no change for variable rates in the near-term.

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.

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