January 18, 2017
No Interest Rate Change Announced as Bank of Canada Awaits Trump Policies
The Bank of Canada has left its trend-setting borrowing rate at 0.5% for the 18th consecutive month – a wait-and-see approach as the U.S. inauguration looms. The Bank Rate is correspondingly 3/4% and the Deposit Rate is ¼%.
The lack of action is partly due to American uncertainty; though there’s just two days to go until U.S. president-elect Donald Trump takes office, there’s no new insight to the trade and fiscal policies he plans to put in place – and that leaves the BoC guessing.
In today’s rate announcement, it states the global outlook is still unclear “particularly with respect to policies in the United States.”
“The Bank has made initial assumptions about prospective tax policies only, resulting in a modest upward revision to its outlook,” the announcement states. As the U.S. remains Canada’s largest trading partner, the BoC can’t confidently forecast growth without knowing what American tax implications could be in store. However, it was widely expected it would take this cautious approach, with 19 out of 22 economists surveyed by Bloomberg predicting no change.
“The outlook is evoliving largely as expected and there’s little reason to rock the boat,” said Benjamin Reitzes, senior economist at BMO Capital Markets, to Bloomberg.
The impact of the American election also continues to be felt in rising bond yields, which have pushed higher the Canadian fixed cost of borrowing.
Slow Home-Grown Improvement
Domestically, growth and economic recovery have stayed sluggish. “In contrast to the United States, Canada’s economy continues to operate with material excess capacity,” states the BoC. “While employment growth has remained firm, indicators still point to significant slack in the labour market.” It adds that while the embattled resource sector has adjusted to oil’s dramatic price downturn, “negative wealth and income effects will persist.”
The BoC also stands with national and provincial real estate board forecasts that real estate investment will slow this year, as a result of tougher mortgage qualification rules and higher fixed mortgage rates. “…residential investment will be tempered by previously announced changes to housing finance rules and by mortgage rates that have risen in response to higher bond yields,” it states.
National GDP is projected to grow by 2.1% this year and next, before returning to full capacity in 2018. Inflation, however, continues to struggle, mainly due to lower food prices. Improving energy prices is expected to five this a boost by later in the year. In all, says the Bank, the general outlook has largely unchanged and “current monetary policy is still appropriate.”
Sticking to the BoC’s Plan
It also appears the BoC won’t be swayed by the opposite approach taken by the U.S. Federal Reserve, which raised interest rates in December and is expected to do so three more times in 2017.
Said Brian DePatto, senior economist at TD, to BNN:
“Governor (Stephen) Poloz is likely to want to continue pushing back against spillover effects in terms of yields and rate expectations, reminding Canadians that our economy is ata difficult point in the business cycle, and so the Bank of Canada is not going to follow the Federal Reserve in tightening.”
What About My Mortgage Rate?
As the Bank of Canada sets the cost of borrowing for variable loans and mortgages, those who hold one won’t see any change to their monthly payments or overall mortgage costs. Variable mortgage rates, which are among the lowest available in today’s marketplace, are also expected to see an uptick in popularity, as fixed rates will be pushed higher by rising bond yields and rules impacting bank funding. Check out Zoocasa’s 2017 Real Estate Predictions for more insight on how your mortgage rate could change this year.