This morning, the Bank of Canada (BoC) announced that the overnight lending rate will continue to sit at 1.00 per cent – a position its held since September 2010. The announcement aligned with reports by Reuters, where none of the 30 economists they polled last month expected to see an interest rate hike today.
What’s interesting, however, is how predictions for an imminent Bank of Canada interest rate hike have changed over the past 12 months. In March of last year, we found that financial analysts and economists were predicting an increase would occur sometime between late-2013 and mid-2014. Today, the median forecast in the same Reuters poll mentioned above shows that an expected hike of 25 basis points – to 1.25 per cent – will occur between July and September 2015.
The continual push-back of a potential interest rate hike is a result of Canada’s soft economy and consistently weak rate of inflation. While Canada’s inflation rate rose to 1.5 per cent in January – its highest reading since June 2012 – it’s still too far from Governor Stephen Poloz’s 2.00 per cent goal, for him to consider making any changes to the overnight rate.
“With inflation expected to be well below target for some time, the downside risks to inflation remain important. The Bank judges that the balance of 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 1.00 per cent.”
While the prediction date for any upcoming changes to the overnight rate continues to be pushed back by economists, one thing is becoming more and more certain: the interest rate is sure to increase – not decrease. Since the “risks associated with elevated household imbalances has not materially changed,” a cut to the interest rate could encourage heavily indebted households to borrow even more.
The next Bank of Canada interest rate announcement is scheduled for April 16, 2014.