Bank of Canada optimistic but maintains rate

Bank of Canada optimistic but maintains rate

But global and domestic growth expected in 2016

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Days after the election of the new Liberal majority federal government, the Bank of Canada weighed in on the state of the economy.

While the rate announcement (released at 10 a.m. EST this Wednesday Oct. 21.) was business as usual for the BoC, the federal banker finally threw off its neutral position on the economy—a stance taken when political campaigns are in full swing—to offer Canadians and economists a glimpse into where the Bank believes the Canadian economy is heading in the near future.

The glimpse shows what most analysts already predicted: overnight rates will remain at 0.5%, and while the BoC still maintains projected growth for Canada’s GDP, it will be a lower than initially predicted during the July Monetary Policy briefing.

The biggest factors helping to suppress Canada’s economic growth are the decline in oil and other commodity prices as well as continued modest global economic growth.

Household debt will continue to grow at a “moderate pace” over the next year, the BoC’s states in this latest Monetary Policy report. In light of this continued spending, the federal bank characterizes the country’s current housing market activity as an example of “trifurcation,” where “markets in B.C. and Ontario have maintained their strength, Alberta and Saskatchewan are experiencing further weakness, and activity in the rest of Canada has been soft.”

Housing markets Bank of Canada

The BoC credits lower mortgage rates to the growing mortgage debt, especially in B.C. and Ontario. However, they also pointed out that these low rates are also contributing to “other forms of consumer” debt and spending. “As a result, the overall ratio of debt to disposable income has edged higher.”

Still the BoC is optimistic. Despite “weak activity in 2015, global economic growth is expected to strengthen over 2016-17.” This projected stabilization extends to the housing market and household debt levels—mainly because of the projected uptick in interest rates that analysts predict will come in as early as 2016. “Looking ahead, the housing market and household indebtedness are expected to stabilize over the projection period as the economy gains strength and household borrowing rates begin to normalize.”

The Bank of Canada is committed to examining the vulnerability associated with increasing household debt with a greater analysis scheduled for release in December 2015.

Already earlier this year the Bank of Canada lowered the overnight rate—which directly impacts variable mortgage rates—once in January and another in July, both times in an effort to stimulate the economy and offset some of the impact from a collapse in oil prices that began November 2014.
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