Bank of Canada Interest Rate Announcement: April 17, 2013

Alyssa Furtado
by Alyssa Furtado April 17, 2013 / No Comments

In his final monetary policy announcement as Governor of the Bank of Canada (BoC), Mark Carney revealed the central bank will leave the overnight lending rate at 1.00 per cent.

The overnight lending rate has remained unchanged since September 2010, which has kept borrowing costs down but also created a hot housing market – one so hot that Finance Minister Flaherty had to change the mortgage rules in both 2011 and 2012, in order to make it tougher for Canadians to qualify for exorbitant amounts of debt. Leaving the overnight lending rate at 1.00 per cent is good news for mortgage holders – especially those with today’s variable mortgage rates which depend on the Prime rate – but it leaves Carney and Flaherty in a position where they need to find other ways to influence the economy.

When determining monetary policy, the BoC looks at a number of factors, including: foreign and domestic economic performance, levels of household debt, and the national inflation rate. Just yesterday, news broke out that Canada’s economic growth was the slowest among Group of 20 countries outside of Europe. With growth forecasts slashed, household debt at an all-time high of 165%, and nearly 55,000 jobs lost in March, it’s no surprise that borrowing rates will continue to remain low while Canada’s policy-makers prepare to take growth-supporting measures.

“The main challenge for Canada’s policy-makers is to support growth in the short term, while reducing the vulnerabilities that may arise from external shocks and domestic imbalances,” the International Monetary Fund (IMF) said in its World Economic Outlook on Tuesday.

The first measure is to keep interest rates low, which Carney announced the BoC would be doing. But Canada will now continue to rely more on exports, and on the growth of the U.S. economy which also continues to show minimal growth.

“Following a weak second half of 2012, growth in Canada is projected to regain some momentum through 2013 as net exports pick up and business investment returns to more solid growth,” today’s BoC press release stated. “Despite the projected recovery in exports, they are likely to remain below their pre-recession peak until the second half of 2014 owing to restrained foreign demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.”

Finally, as the IMF had hoped, Carney announced the central bank would not be tightening its monetary policy until the economy shows some improvement.

“With continued slack in the Canadian economy, the muted outlook for inflation, and the constructive evolution of imbalances in the household sector, the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required, consistent with achieving the 2 per cent inflation target.”

The next interest rate announcement is scheduled for May 29, 2013.

Source: Bank of Canada – Interest Rate Announcement and Monetary Policy Report – April 17, 2013