The Bank of Canada held its target for the overnight rate at 1.75 per cent on Jan. 9, where it has been since October 2018, and is lowering its growth forecast this year for Canada and around the world.
After raising the rate three times last year, some experts expected the Bank would do so again, either in late 2018 or early this year.
So, what does this latest non-action mean, and what can Canadian consumers expect in the coming months?
“The Bank gave several reasons for its decision to keep rates steady,” says Rubina Ahmed-Haq, personal finance guru and Homes Publishing columnist. “This includes lower oil prices, a weaker outlook for the global economy and Canada’s economy slowing more than expected.
“It was a surprise that market pessimism did not come up,” she adds. “Despite stock market volatility making headlines for the last two months, there was no mention of the wild swings investors have been experiencing. The Bank did talk about weaker consumer spending and housing investment. This could be because of Canadian investors watching their portfolios and not feeling as confident in their spending.”
Sill, Ahmed-Haq says, the Bank remains very rosy on Canada’s economy, noting it has performing well overall. In its statement, the Bank says, “Growth has been running close to potential, employment growth has been strong and unemployment is at a 40-year low.” But still not enough to raise rates at this time.
Energy sector a concern
“The energy sector has been a concern for the Bank for some time now, but there seems to be a new focus on the housing sector, especially on the impact of mortgage guidelines changes and the five rate increases that have happened in the past 18 months,” James Laird, co-founder of Ratehub Inc. and President of CanWise Financial mortgage brokerage, told Homes Publishing.
Ahmed-Haq and Laird agree we should still expect higher rates in the coming months.
“The policy interest rate will need to rise over time into a neutral range to achieve the inflation target,” says Ahmed-Haq.
Rate hikes to come
Forecasters are now predicting two rate hikes this year, is down from earlier predictions of as many as three rates hikes in 2019.
“The Bank’s moderated outlook in the last two announcements has caused bond yields in Canada to drop lower than any point in 2018,” says Laird. “However, we are yet to see a corresponding decrease in mortgage rates. We would advise consumers to keep a close eye on mortgage rates in coming weeks.”
Highlights from the Bank’s announcement
- Bank of Canada maintains target for overnight rate at 1.75 per cent
- Canadian economy performing well overall
- Employment growth strong
- Unemployment rate at 40-year low
- Canadian consumption spending and housing investment weaker than expected
- Housing markets adjusting to municipal and provincial measures, new mortgage guidelines and higher interest rates
- Household spending to be dampened by slow growth in oil-producing provinces
- Real GDP growth forecast at 1.7 per cent for 2019
- Growth of 2.1 per cent forecast for 2020