Canada’s Rate Stays at 1.00%

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As expected, the Bank of Canada kept its key interest rate on hold last Thursday, even amongst growing concern over consumer debt. This rate has stood at a near record low of 1.00% since September of 2010 in an effort to boost economic growth. Nothing in the statement suggests a change in the rate anytime soon. In fact, the tone of the Bank’s official statement was relatively optimistic. 

A Change in the Tide?

The latest statement from the Bank of Canada suggested that uncertainty around the global economic outlook has decreased since January. This comes following modest U.S. expansion and modest gains in the American labour market. While growth in China is moderating to an expected still-high, the global economy continues to grow below its trend rate.

The Bank went on to say that recent developments now suggest “that the outlook for the Canadian economy is marginally improved” since the last report was released in the January Monetary Policy Report. It is predicted that the economy will likely grow faster than predicted in the first quarter, thanks to an increase in private demand and underlying economic momentum.

Skeletons in the Closet

And yet, Canadian consumer debt continues to irk experts. The Bank of Canada anticipates that household spending will remain high relative to the nation’s GDP. Cheaper borrowing costs may be making it easier for Canadians now, but what about in the future? Sal Guatieri, senior economist at BMO Capital Markets feels that “while rates are unlikely to increase in the near term, the next move is more likely to be up rather than down.” Many believe that Canadians are currently borrowing beyond their means, which could have potentially devastating repercussions come next year.

What About Inflation?

In Thursday’s statement, the Bank of Canada stated that the profile for core and total CPI inflation has become somewhat firmer. Reduced economic slack and higher oil prices are mainly to thank for this better-than-expected result. As such, the Bank of Canada expects total inflation, along with core inflation, to be around 2 percent over the forecast horizon.

What to Expect in the Future

The market responded positively to the central bank’s announcement Thursday, as the loonie rose almost half a cent shortly after the 9 a.m. news release hit the wire. However, the announcement has experts wondering whether a hike might not be far off. “If this were a normal cycle,” explains Derek Holt, an economist with Scotiabank, “they probably would be hiking now.” However, given the shaky outlook, most anticipate that the Bank of Canada will stay the path and continue to keep rates low – possibly until the third quarter of 2013.

Why No Hike?

There are a number of reasons why economists expect the bank to stay moored to their current rate. Here’s a quick look at what a rate hike could do to the economy:

  • Lift the loonie higher: this could make it impossible for Canadian exporters to crack global and U.S. markets.
  • Consumers are ill-prepared for a rate change: increasing the cost of borrowing could cause the economy to ground to a halt.
  • Anticipated problems to the south: markets expect the U.S. federal government will withdraw stimulus in 2013.
  • Oil prices: Middle East political instability is expected to hamper global growth and dampen economic momentum.
At the end of the day, the Bank of Canada believes that much of the economic improvement that has taken place in the last quarter is of a temporary nature. As such, it hasn’t changed the way they plan to approach the situation. The Bank terminated their release by saying that they will:
…continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and set monetary policy consistent with achieving the 2 per cent inflation target over the medium term.

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