For the 29th consecutive announcement in a row, the Bank of Canada (BoC) has revealed that the overnight lending rate will remain at 1 per cent – a position its held since September 2010.
The overnight lending rate – which is the interest rate at which banks lend money to one another – is expected to remain unchanged until mid-2015; that would mark nearly five years at 1 per cent, which would be the longest span of inactivity in more than 60 years. This is good news for variable rate mortgage holders whose rates are attached to Prime, as an increase to the overnight lending rate could result in an increase to some lenders’ Prime rates and, therefore, variable mortgage rates.
Despite the fact that we know the interest rate will eventually go up, and not down, Canadians are now being told they shouldn’t expect it to ever be within the normal “neutral” range again. Before the financial crisis in 2009, the neutral overnight lending rate range was between 4 and 4.5 to percent – not too low to spur inflation and not too high to stifle economic growth. When the overnight lending rate eventually does climb, some predict the highest it will reach is 3.5 per cent. Why? Well, there’s one big reason: inflation.
“Inflation in Canada remains low. Core inflation is expected to stay well below 2 per cent [the BoC’s target rate of inflation since 1995] this year due to the effects of economic slack and heightened retail competition, and these effects will persist until early 2016.”
Several economists have also downgraded their inflation rate forecasts for the year, seeing that the export sector will take longer to recover and the housing market is slowing.
“Recent developments are in line with the Bank’s expectation of a soft landing in the housing market and stabilizing debt-to-income ratios for households. Still, household imbalances remain elevated and would pose a significant risk should economic conditions deteriorate.”
As such, Central Bank Governor Stephen Poloz has no choice but to be reluctant about increasing interest rates.
“The Bank judges that the balance of these risks remains within the zone for which the current stance of monetary policy is appropriate and therefore has decided to maintain the target for the overnight rate at 1 per cent. The timing and direction of the next change to the policy rate will depend on how new information influences the balance of risks.”
The next interest rate announcement is scheduled for June 4, 2014.