No Rate Change in Bank of Canada’s March Announcement

The Bank of Canada may have rung January in with a rate hike, but the central bank has opted to hold on the cost of borrowing in its March announcement, leaving its trend-setting Overnight Lending Rate at 1.25 per cent.

Bank Cautious as Trade War Looms

Reacting to uncertainty in the market was a main theme in the BoC’s announcement, as the future of NAFTA and possibility of an American trade war have thrown the central bank’s growth plans into flux, despite the Canadian economy running close to capacity.

“However, trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks,” the BoC states in its release.

“While the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target.”

Encouraging Canadian Growth

The Canadian economy grew by 3 per cent in 2017, which was in line with what the BoC forecasted in its January Monetary Policy Report. However, a combination of higher import prices, softer exports, and less business investment have led to a quieter start to the new year. Inflation is running close to 2 per cent, boosted by seasonally higher gasoline and electricity prices, as well as the higher minimum wage introduced in some provinces. While wages have stabilized, the Bank notes growth “remains lower than would be typical in an economy with no labour market slack.”

A Softer Housing Market

The BoC is also keeping a keen eye on housing market performance, noting that, following the implementation of new mortgage rules and regulations late last year, sales have dropped from December to February.

“It will take some time to fully assess the impact of these (new rules) as well as recently announced provincial measures, on housing demand and prices,” the BoC states. “More broadly, the Bank continues to monitor the economy’s sensitivity to higher interest rates. Notably, household credit growth has decelerated for three consecutive months. The implications of the recent federal budget for the outlook for growth and inflation will be incorporated in the Bank’s April projection.”

When Will the BoC Hike Rates Again?

While it was widely anticipated there would be no change in today’s announcement – all 21 economists surveyed by Bloomberg were unanimous rates would hold – it’s not yet clear how much the BoC’s plan to tighten monetary policy will be derailed by trade events south of the border.

The general consensus that three rate hikes would occur this year is now in doubt, with expectation of the next increase no sooner than July, extended from April or May.

Aubrey Basedo, head of fixed income at BlackRock, told the Financial Post that, given the concerns over trade and household debt levels, the BoC will only hike once more in 2018.

The market is being too aggressive for what we’ve seen so far,” he said.“That market reaction is tied more toward what’s likely to happen in the U.S. — that is, the fiscal impulse generates strong growth there and we benefit from that.”

However, with the U.S. Federal Research will likely hike its own rate three times this year, not keeping up with American monetary policy will put additional downward pressure on the Loonie, which fell to $1.29 last week, the lowest level since December.

What Does This Mean for Mortgage Borrowers?

The BoC’s Overnight Lending Rate is used to set the Prime rates offered by Canada’s Big Six banks. Because there has been no change this month, it’s anticipated the costs for variable-rate mortgages and lines of credit will not fluctuate in the medium term.

Related Read: How Higher Bank of Canada Rates Will Impact Your Mortgage

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. Find her on Twitter at @pjeg14.

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