Despite an upcoming change in job title, departing Bank of Canada Governor Mark Carney announced this morning that he will leave the overnight lending rate at 1.00 per cent.
The Bank of Canada (BoC) looks at a number of factors when determining monetary policy, such as foreign and domestic economic performance, levels of household debt, and the national inflation rate. Today’s Bank of Canada interest rate announcement came as no surprise, as the Canadian economy continues to under-perform.
The gross domestic product (GDP) has slowed to a crawl – after a 0.1 decline in August and no growth in September, the GDP grew a lacklustre 0.1 per cent in October. This is well below the BoC’s forecast of 2.5 per cent for the fourth quarter of 2012.
“The slowdown in the Canadian economy in the second half of 2012 was more pronounced than anticipated and economic activity is expected to be more restrained. The economy is now forecast to return to full capacity in the second half of 2014.”
As for household debt, the debt-to-income ratio hit a new high in the third quarter of 2012 – reaching 164.6 per cent, up from 163.3 the previous quarter. And the national inflation rate fell by 0.8 per cent in November, its lowest level in three years.
The overnight rate is important to Canadian mortgage owners because it influences the interest rates at which banks can borrow, which then trickles down to the consumer level. Homeowners with variable mortgages attached to prime rate are most exposed to changes in the overnight rate.
So, should we expect a Bank of Canada interest rate hike in the near future? Not unless the economy recovers quickly. Ottawa has left the overnight rate untouched for 28 consecutive months, as the economy has continued to show only moderate growth.