Bank of Canada Holds Benchmark Interest Rate at 1%

Jane Switzer
by Jane Switzer October 25, 2017 / No Comments

Following back-to-back interest rate hikes, the Bank of Canada announced Wednesday it’s taking a breather and holding its overnight lending rate at 1%. After nearly seven years of ultra-low interest rates, the country’s central bank raised its benchmark interest rate twice this year: First in July, and again in September.

“Canada’s economic growth in the second quarter was stronger than expected, and was more broad-based across regions and sectors,” the bank said in a release. “Growth is expected to moderate to a more sustainable pace in the second half of 2017 and remain close to potential over the next two years.”

The decision to stand pat is in line with economists’ forecasts amid uncertainty over the future of the North American Free Trade Agreement (NAFTA), tighter rules on uninsured mortgages, and a ream of Statistics Canada data indicating the economy is cooling after a red-hot start to the year.

Canada’s economy expanded at an annualized pace of 4.5% in the second quarter, but has a moderated outlook of 2% for the second half of 2017. While Canada’s economy is operating at almost full capacity, the bank said “there is still slack in the labour market.”

CIBC senior economist Avery Shenfeld wrote in a research note last week that due to “data lags,” economists won’t be able to measure the effects of the September rate increase until March 2018.

Inflation picked up due “stronger economic activity” and higher gasoline prices due to Hurricane Harvey. The bank now expects inflation to hit its 2% target in the second half of 2018 due to the recent strength of the dollar. A strong loonie also means the slowing in growth of exports and business investment, though “both expected to continue to make a solid contribution to GDP growth.”

The bank noted that global economic activity is “progressing,” but said there’s “substantial uncertainty” clouding the renegotiation of NAFTA. The most recent round of talks reached a stalemate after aggressive protectionist demands from the United States including upping domestic automotive content requirements, eliminating Canada’s dairy supply management system, and a sunset clause that would kill the agreement after five years if the three signatory countries (Canada, the U.S., and Mexico) can’t renegotiate. The head of Canada’s largest private sector union recently described the talks as being “in the toilet.”

Wednesday’s rate announcement spares consumers, particularly homeowners in Canada’s overheated housing markets, from absorbing another payment increase on variable rate loans within a relatively short period of time. Canadian household debt levels hit a record high in the second quarter of 2017, according to Statistics Canada, with $1.68 in credit market debt owed for every dollar of disposable income.

A survey by insolvency firm MNP Ltd. released two days before the rate announcement found 50% of respondents are $300 away from not being able to pay their bills and debts each month. More than a quarter of those with mortgages said they’re “in over their head” with their current payments. In its release, the bank acknowledged the sensitive relationship between high debt levels, household spending, and interest rates.

The Bank of Canada’s final rate announcement of the year is scheduled for Dec. 6. Bank of Canada Stephen Poloz reiterated in a September speech there’s “no predetermined path” for interest rates and that decisions are based on incoming data.

Source: Bank of Canada