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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3 comments on “Bank of Canada optimistic but maintains rate

  1. I would not hold your breath about the Bank of Canada finding another excuse for cutting interest rates again. However, I noticed that Canada, provincial, municipal, corporate bond rates, yields have been going up since Poloz’s and the Bank of Canada’s interest rate cut in the summer of this year, 2015.

    They are all about 50 or more basis points or by a 0.50%, half a percentage point at the longer end of the yield curve, interest rates on these bonds from the maturities of 13 to 30 years.

    Shorter terms less than 13 years, GIC’s and bonds have gone up by 15 to 30 basis points. The opposite is happening with higher government, corporate bond yields in Canada from the 2, 25 basis points interest rate cuts from the Bank of Canada totaling 50 basis points, a 0.50% percentage point or half of one percentage point.

    This maybe the new norm as shorter term interest rates stay go up a little or stay lower for longer and mid to longer bond rates, yields go even higher.

    Although, I did notice in the last 6 years and even times, 10 years or when between 4.00% to 4.7%, once and awhile, close to 5.00% bond rates, yields reach that level, there is strong resistance to stay there or go much lower.

    The last time I saw 4.22% bond yields, rates was back in December-2013 for longer term maturities of 19 years to 30 years when provincial bonds, strips, zero coupons were above 4.00% for even middle maturities of 12 to 16 years.

    Many are expecting the Bank of Canada to stay on hold until 2017 to 2018 and some expect one more 25 basis points reduction in the Bank of Canada’s interest rate to 0.25% that much closer to 0%.


  2. I forgot to add that the 50 basis points or 0.50% higher bond yields, rates are higher not lower since Poloz’s and Bank of Canada’s interest rate cut in this summer, 2015.


  3. I made a mistake, I meant to say that I noticed at 4.00% to 4.7%, even close to 5.0%, bond yields, rates on government bonds, strips, zero coupons, they don’t stay there or go just go higher but they seem to drift down for months, years.


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