As expected, the Bank of Canada (BoC) announced this morning its target overnight lending rate will continue to hold steady at 0.50%. The central bank hasn’t changed its key interest rate since July 2015, with Bloomberg reporting “consensus” among the 16 analysts it surveyed that it won’t move until 2018.
With inauguration of Donald Trump as U.S. president just two days away, the president-elect’s unpredictability presents a wildcard for Canada’s policy-setting central bank.
“Uncertainty about the global outlook is undiminished, particularly with respect to policies in the United States,” the BoC said in a press release. “The Bank has made initial assumptions about prospective tax policies only, resulting in a modest upward revision to its US growth outlook. Overall, the global economy is strengthening largely as expected and prices of some commodities, including oil, have risen.”
Inflation remained at the low end of the bank’s target 1-3% range, mainly due to declines in food prices.
“As consumer energy prices rise and the impact of lower food prices dissipates, inflation is expected to move close to the 2 per cent target in the months ahead and remain there throughout the projection horizon while excess capacity is being absorbed,” the bank says.
Housing has been a bright spot of growth amid depressed oil prices and weak exports, but soaring home prices and overvalued markets across Canada are big risks to the economy. In October, the federal government introduced new mortgage rules aimed at keeping a lid on growing household debt by introducing a more stringent “stress test” on high-ratio insured mortgages to ensure homebuyers can still meet their payments when interest rates begin to rise.
Weeks later, the Canada Mortgage and Housing Corporation issued a “red” warning for the country’s housing market, finding “strong evidence of problematic conditions” as house prices climbed faster than income and population growth.
Although the U.S. Federal Reserve raised its benchmark interest rate in December for the first time in a year, the central bank signalled it’s in no hurry to follow suit and implement a Bank of Canada interest rate hike, noting today that “indicators still point to significant slack in the labour market” compared to our southern neighbours.
In its latest monetary policy report, the BoC said “prospective protectionist trade measures in the United States would have material consequences for Canadian investment and exports,” while noting its modestly hopeful outlook for the Canadian economy doesn’t account for the “full range” of possible policy changes both globally and under the new U.S. president.
Overall, the bank’s outlook on Canada’s economy is little changed since its last rate announcement in December: its gross domestic product forecast is 2.1% in 2017, compared to its projection of 2% in its October, and it expects the economy to be running at full steam “around mid-2018.”
That next Bank of Canada interest rate announcement is scheduled for March 1.
Source: Bank of Canada