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June 5, 2012

Bank of Canada Keeps Overnight Rate Locked

by Editor

The Bank of Canada announced that it would maintain its overnight rate of 1 percent this morning, thanks to disproportionate growth in the Canadian economy. According to the official release from the Bank, economic growth in Canada was slightly slower than expected in the first quarter of 2012. Even so, the underlying economic momentum appears largely consistent with projected expectations. As such, the latest release from the Bank appeared to ease up on the possibility of an imminent rate hike. However, the overall tone of the piece did little to dispel the fact that rates will increase eventually. 

Reading Between the Lines

Tuesday’s announcement recycled statements from April’s release, in which Mark Carney remarked the need to drive borrowing cost up in order to head off inflation. Carney maintains that this is still the case, however he is now signalling that such moves would hinge on further improvements in business conditions. “To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.”

A recent decrease in global economic growth has caused the Bank of Canada to remain vigilant about rates. Not surprisingly, the ripple effect from the European debt crisis remains a constant reminder of economic unrest. Since Canadian interest rate policy is largely impacted by this factor, the Bank of Canada continues to monitor and react to EU events and any future changes are likely to come as a direct consequence. Carney also noted that government spending will not be strong enough in the near future to boost economic growth; he also noted that it would be unrealistic to depend on exports given the slow demand in the United States and the competitive nature of the Canadian dollar. What’s more, activity is slowing in emerging market economies such as China, Brazil, and India.

What this Means for Mortgage Rates

For low mortgage rate seekers, the above suggestion that the prime lending rate will hold steady at 3.00 percent for the near future. If this is the case, the current rate plateau will be the nation’s longest since the 1950s. Is there a possibility that rates will decrease? Not likely. According to the Bank’s release, “domestic financial conditions remain very stimulative.” As such, things would need to get much worse in order to justify a cut.

On the Housing Front

According to the Bank, Canadian housing activity was stronger than expected. And while this provides a positive boost to the nation’s economy, it will likely create more problems down the line as households continue to add to their debt burden in an “environment of modest income growth.”

Carney’s recent statements, and the Bank’s formal release, included a subtle yet significant shift in tone, advising Canadians of a rate stay. Based on today’s announcement, economists now believe that the Bank will hold steady at 1 percent until next year.

Best rate mortgage seekers can view the Bank of Canada’s formal release online here. The next scheduled date for announcing the overnight rate target is July 17, 2012. The Bank will also post an update on the economy’s outlook and inflation, including risks and the projection, on July 18, 2012.

Stay tuned to Mortgage Talk Canada for all of the latest mortgage and financial news.

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