Today was the Bank of Canada’s final interest rate announcement of 2011. As expected, the target overnight rate, sometimes referred to as the key interest rate, remained at 1.00% as it has for the last ten interest rate announcements dating back to September 8, 2010. This is in line with the predictions made by most economists.[i]. For variable mortgage holders, this means the prime rate upon which their variable mortgage discount/premium is based will be unchanged as well.
Dawn Desjardins, Assistant Chief Economist for RBC Economics, believes that the risk and instability of Europe’s financial markets were a key factor in the Bank of Canada’s decision [ii]. She states that Canada’s economy had stronger than expected growth in Q3 but external global factors will affect our economy going forward. Although she did feel that our economy is still in relatively good standing.
Where are interest rates headed?
A Reuters poll released last Wednesday surveyed 40 economists and strategists which showed the median forecast for the next key interest rate hike would occur in the fourth quarter of next year. This indicates that we can expect low interest rates throughout most of 2012.In the same poll, there were also strong opinions calling for the next move to not occur not until 2013[iii].
By how much are rates expected to increase? The economists from the Reuters poll indicated that when rates do move up, they will do so by 0.25%.
However, there is a small minority of economists/forecasters that believe a rate cut is in store for Canada,such as Sheryl King of Bank of America Merrill Lynch. She expects the Bank of Canada to cut rates by 0.25% in early 2012.
“On balance, recent economic indicators in Canada suggest that growth in the second half of this year is slightly stronger than the bank projected in October” – Bank of Canada
Domestic growth in the third quarter was better than expected, although with major job loss in over the past two months (73,000 jobs lost), it reflects risk of a slowdown in Canada’s economy. However, Jimmy Jean, the economist at Desjardins Capital Markets, believes this risk will not spell rate cuts for the Bank of Canada, as Mark Carney will likely sit on the sidelines until 2013.
The next scheduled key interest rate announcement is set for January 17th, 2012.