Bank of Canada Holds Key Interest Rate at 1.25%

Jane Switzer
by Jane Switzer April 18, 2018 / No Comments

Higher interest rates are a matter of when, not if, but Canada’s central bank announced Wednesday it’s holding its overnight lending rate at 1.25%.

“Higher interest rates will be warranted over time, although some monetary policy accommodation will still be needed to keep inflation on target,” the Bank of Canada said in a release.

Inflation is running close to the bank’s 2% target, with minimum wage increases in Ontario and Alberta and the effects of higher gasoline prices expected to keep inflation at that target for the rest of the bank’s projection horizon.

Canada’s unemployment rate held at a record 40-year low of 5.8% while hourly wage growth edged up slightly to 3.3% in March. Despite generally positive sentiment in the Bank of Canada’s latest business outlook survey, “both exports and investment are being held back by ongoing competitiveness challenges and uncertainty about trade policies.”

A persistent cataract in the bank’s outlook is uncertainty around global trade and the renegotiation of the North American Free Trade Agreement (NAFTA). After seven rounds of talks over eight months, representatives from Canada, Mexico, and the United States have entered a so-called “permanent round” of negotiations in Washington, where they’re expected to haggle until a deal is reached.

Canada’s first-quarter GDP growth was weaker than expected, owing to housing markets’ reactions to stricter federal mortgage rules and faltering exports “limited by capacity constraints” and “transportation bottlenecks.” However, the bank projects the economy will operate slightly above its potential over the next three years, with real GDP growth of about 2% in both 2018 and 2019, and 1.8% in 2020.

Wednesday’s decision spares borrowers — for now — from another turn of the screw on rising interest rates for variable rate mortgages, home equity lines of credit (HELOCs), and personal lines of credit. But with almost half of all existing mortgages in Canada facing renewal in 2018, it’s likely more Canadians will find higher mortgage payments straining their household budgets — especially if they’re already living on the brink.

A recent online survey from insolvency firm MNP Ltd. found 43% of Canadians are already feeling the effects of higher interest rates (up five percentage points from three months ago), while 46% said they’re $200 or less away from financial insolvency after paying bills and debt obligations at the end of the month. The Bank of Canada has repeatedly cited high household debt levels and their sensitivity to interest rates as a threat to the country’s financial stability.

The Bank of Canada’s next interest rate announcement is scheduled for May 30.

Source: Bank of Canada