In his fourth and final interest rate announcement of the year, Bank of Canada (BoC) Governor Stephen Poloz announced this morning that the overnight lending rate would continue to stay put at 1.00 per cent – a position it’s held since September 2010, which has created a favourable borrowing environment for Canadians.
However, the Organization for Economic Co-operation and Development (OECD) released a report this month that said with the Canadian economy getting ready to return to more stable growth, the days of low interest rates may be coming to an end – and soon.
“With spare capacity narrowing by the end of 2015, monetary policy tightening may need to begin by late 2014 to avoid a buildup of inflationary pressures,” it said. “It is assumed in the projection that the first policy rate increase occurs in the fourth quarter of 2014 and that the rate rises steadily to 2.25 per cent by the end of 2015.”
Of course, an interest rate increase of that size could drastically affect the mortgage payments and affordability for variable rate mortgage holders in Canada, and would likely cause lenders to increase their fixed mortgage rates as well.
OECD’s opinion is not a popular one. Most economists predict the central bank will leave the key interest rate at 1.00 per cent until the first quarter of 2015 – and some even believe the rate will go down, not up.
In an article published earlier this month, the BoC’s Deputy Governor John Murray demystified one myth about the central bank by saying it doesn’t necessarily need to boost interest rates to “normal levels”, even if the economic growth and rate of inflation are close to their targets.
“Headwinds and tailwinds are often present, threatening to push economic activity and inflation higher or lower,” he wrote. “Monetary policy needs to lean against these forces with opposing pressure from higher or lower interest rates to stabilize the economy and keep inflation on target.”
Unfortunately, today’s announcement from the BoC concluded that inflation has moved further below the central bank’s target of 2 per cent. Core inflation is being held down by significant excess supply, effects of heightened competition in the retail sector and lower gas prices.
“Overall, the balance of risks remains within the zone articulated in October. Weighing these considerations, the Bank judges that the substantial monetary policy stimulus currently in place remains appropriate and therefore has decided to maintain the target for the overnight rate at 1 per cent.”
The next interest rate announcement is scheduled for January 22, 2014.