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In a surprise move, the Bank of Canada announced on January 21^st, 2015 that it was lowering its trend-setting overnight lending rate from 1 per cent to 0.75 per cent. This marks the first change to the Bank’s key interest rate in more than four years.

The decision to cut rates was the result of the recent sharp drop in the price for oil, which the Bank said “will be negative for [economic] growth and underlying inflation in Canada.”The Bank’s new Canadian economic forecast assumes that oil prices will average around US$60 per barrel, which means the Bank believes oil prices will rise from the mid-to-high $40 range where they stood at the time of the announcement.

The Bank said that total CPI inflation was already starting to reflect lower oil prices and that inflation was expected to drop below the lower bound of its target range for inflation of between one and three per cent before returning to the target range in the fourth quarter of this year. “This points to interest rates staying lower over the rest of the year,” said Gregory Klump, CREA’s Chief Economist.

The Bank said “the oil price shock is occurring against a backdrop of solid and more broadly-based growth in Canada in recent quarters. Outside the energy sector, we are beginning to see the anticipated sequence of increased foreign demand, stronger exports, improved business confidence and investment, and employment growth.”

The cut to the Bank’s key interest rate will act as another shoulder against the wheel pushing Canada’s economy in this direction while helping put a floor under falling inflation.

Even before the surprise rate cut, a rising spread between bond and mortgage rates was already putting downward pressure on five year fixed interest rate mortgages.

As of January 21st, 2015, the advertised five-year lending rate stood at 4.79 per cent, unchanged from the previous Bank rate announcement on December 3rd, 2014 and down 0.45 percentage points from the same time one year ago. The Bank of Canada’s next policy interest rate announcement is March 4^th, 2015 and the next update to Canadian economic forecast will be published in its Monetary Policy Report on April 15^th, 2015.

(CREA 01/21/2015)

The Bank of Canada announced on December 3^rd, 2014 that it was holding its trend-setting overnight lending rate at 1 per cent.

Economic conditions around the world have changed rapidly in recent months. The Bank’s December 3^rd announcement took a decidedly “on the one hand, on the other hand” approach in addressing how recent developments have altered not only the outlook for inflation and the economy, but also the risks to that outlook.

While it considers the potential upside and downside risks to be balanced, the Bank sees them as having intensified.

1. Risks to the Canadian economy: On the upside, the Bank acknowledged Canadian exports as having improved, resulting in stronger business investment and employment, suggesting the return of balanced and self-sustaining growth. On the downside, the Bank indicated lower prices for oil and other commodities will act as a drag on the Canadian economy, and that household imbalances present a significant risk to financial stability.
2. Inflation risks: On the downside: weaker oil prices could lower inflation. On the upside, The impact of lower oil price may be tempered by a stronger U.S. economy, Canadian dollar depreciation, and recent federal fiscal measures. The Bank acknowledged inflation is up by more than expected due largely to what it considers to be temporary factors, and while underlying inflation has edged up it remains below the 2 per cent target.
3. Interest rate risks: On the upside, developments as outlined above together with upward revisions to past economic data suggest that slackness in the Canadian economy may be less than the Bank previously thought. That means the expected date for the first interest rate hike could be moved up. On the downside, conditions in the labour market continue to suggest there is still plenty of slackness in the Canadian economy. Additionally, lower oil prices could mean slower growth and more time before the Bank starts raising interest rates.

What does all this mean for the interest rate outlook? At this point, not much. The first hike is still pencilled in for later next year. Whether that outlook changes will depend on what happens in the months ahead – and perhaps most importantly, what happens to the price of oil.

As of December 3rd, 2014, the advertised five-year lending rate stood at 4.79 per cent, unchanged from the previous Bank rate announcement on October 22nd, 2014 and down 0.55 percentage points from the same time one year ago.

The next interest rate announcement along with the next update to the Monetary Policy Report will be on January 21^st, 2015.

(CREA 12/03/2014)

The Bank of Canada announced on October 22nd, 2014 that it was holding its trend-setting overnight lending rate at 1 per cent.

Its most recent rate announcement and Monetary Policy Report suggest a number of reasons why interest rates aren’t going up anytime soon:

1) Recovery in exports not ready to stand on own legs. Recent growth in the U.S. has led to a weaker Canada–U.S. currency exchange rate. That is good news for Canadian exports to the U.S. , our largest trading partner. The Bank still expects that the engine for Canadian economic growth will switch from consumer spending to exports. A hike in its trend-setting interest rate would put that in jeopardy, so making that switch depends in part on the Canadian dollar remaining at its weakened level.

2) Business investment remains weak. Stronger investment is the other engine for Canadian economic growth that the Bank expects to take over from consumer spending. Stronger business investment continues to rely on — and will likely lag — a sustained improvement in exports. Stronger exports and investment both require that interest rates remain low.

3) Inflation is on target. The Bank said it views overall inflation as evolving in line with the Bank’s expectations. The Bank also said, “underlying inflationary pressures are muted”. That means it thinks its trend-setting policy interest rate is right where it needs to be. That makes raising or lowering it is unnecessary. Inflation remains close to the Bank’s 2 per cent target.

4) Global uncertainty. The Bank noted that global economic growth was weaker than it anticipated in its July Monetary Policy Report, and is facing headwinds. It also recognized a “significant correction in global financial markets”. European economic growth was revised down significantly over the forecast horizon. The recent decline in oil prices also introduces uncertainty for investment in Canada’s energy sector.

5) Canadian economic growth will be running below capacity for longer. The Bank pushed back the date as to when it expects the economy to return to full capacity. It previously expected it to happen “around mid-2016”. Now it expects it will take until “the second half of 2016”.

As of October 22nd, 2014, the advertised five-year lending rate stood at 4.79 per cent, unchanged from the previous Bank rate announcement in September and down 0.55 percentage points from one year ago. The next interest rate announcement will be on December 3rd, 2014.

The next update to the Monetary Policy Report will be on January 21st, 2015.

(CREA 10/22/2014)