We could almost re-post the same blog every time there is an interest rate announcement because the Bank of Canada has been repeating itself since September 2010, keeping the key interest rate at 1%. Often citing variations on the same themes – the economic woes of Europe and the US, the Canadian dollar, and the direction of the US Federal Reserve – the Bank says it is constrained by external economies in its decision-making.
The problem is cheap debt has pushed Canadians into a buying frenzy that has many concerned about the record-breaking level of household debt. On the one hand, the bank would like to discourage over-consumption but, on the other, its hands are tied, preventing a Bank of Canada interest rate hike.
In the words of Douglas Porter of BMO Capital Markets “unfortunately they face this eternal tension of a healthy domestic economy and a shaky external environment.”
Finance Minister Jim Flaherty similarly has not taken on the responsibility of tackling the household debt problem (yet) by tightening mortgage lending standards – as many thought he would – and so the Bank of Canada may be forced to take action soon by raising the key interest rate later this year.
For now, variable mortgage holders can continue to reap the benefits of the low Bank of Canada interest rate to which their financing costs are based on.