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The Bank of Canada’s (BoC) overnight rate held at 1.75 percent last week, due to a global economy showing signs of improvement since October and a recovery in the housing sector (in some parts of Canada).
“Quite a lot has happened during the past three months. Global economic growth appears to have bottomed, as shown by an upturn in trade and manufacturing indicators,” said BoC governor Stephen Poloz in his rate announcement. “Uncertainty remains elevated, of course, but the Phase One China-U.S. trade deal and the pending ratification of CUSMA are positive developments that should lead to lower business uncertainty over time everywhere, including in Canada.”
A reduced risk of rising inflation was an influencer.
“Our analysis suggested that overall excess capacity in the Canadian economy has increased, which will bring a degree of downward pressure on inflation,” said Poloz. “We believe that the excess capacity is not uniformly distributed, but is concentrated on the Prairies and in Newfoundland and Labrador. Our estimate of the output gap is based on a partially updated estimate of the economy’s potential. We will have a more fulsome update in April. At the same time, household financial vulnerabilities remain elevated, although we will be analyzing the positive implications of a higher household savings rate for those vulnerabilities.”
Finder.com’s panel of economists unanimously predicted the rate hold, although 31 percent of the panel thought it should have been cut.
Poloz said it wasn’t necessary. Yet.
“All things considered, it was Governing Council’s view that the balance of risks does not warrant lower interest rates at this time. In forming this view, we weighed the risk that inflation could fall short of target against the risk that a lower interest rate path would lead to higher financial vulnerabilities, which could make it even more difficult to attain the inflation target further down the road,” he said. “Clearly, this balance can change over time as the data evolves. In this regard, Governing Council will be watching closely to see if the recent slowdown in growth is more persistent than forecast. In assessing incoming data, the Bank will be paying particular attention to developments in consumer spending, the housing market and business investment.”
James Laird, co-founder of Ratehub Inc. and president of CanWise Financial mortgage brokerage, believes a rate cut is in order at some point this year.
“The Bank’s announcement was notably pessimistic, citing several areas of concern including weaker economic growth, falling exports, slowing business investments, slowing job creation and declining consumer confidence,” says Laird. “If these variables continue to decline, monetary stimulus may be required at some point in 2020. The Bank’s language and tone is signalling that a rate drop is now more likely.”
Writing in the National Bank’s Financial Markets newsletter, Warren Lovely, Jocelyn Paquet and Taylor Schleich said the BoC left the door open to a cut.
“Given today’s dovish statement and the so-called crystallization of downside risks, one can hardly rule out a cut. Still, we’re reluctant to abandon our long-standing call for no cut(s) from the BoC in 2020, with our rate call incorporating a near-term economic revival inclusive of fiscal stimulus the BoC has yet to fully factor in. Market expectations aside, at or above-target core inflation might likewise argue for keeping policy on cruise control for the remainder of Governor Poloz’s term (which expires June 2nd).”
Alicia Macdonald, associate director of Economic Forecasting, Conference Board of Canada, and a member of the Finder.com panel, agrees.
“Growth is expected to pick back up in the first quarter of this year and grow roughly in line with the economy’s underlying potential this year,” says Macdonald. “With the latest Business Outlook Survey suggesting that there is little excess economic capacity outside of the Prairies, inflation firmly at target and risks around household vulnerabilities due to high debt levels, the Bank of Canada has little reason to deviate from its holding pattern.”
Deputy chief economist at Scotiabank, Brett House, also a Finder.com panel member, takes the opposite view.
“We see ample reasons for the Bank of Canada to pursue a 25 bps cut in Q1 followed by a second cut in Q2,” says House. “Although inflation is more or less on the two percent target, this largely owes to idiosyncratic and transitory factors that are unrelated to economy-wide slack or any lack of it. Our measures of slack are widening and the aforementioned transitory factors are likely to reverse and put renewed downside pressure on inflation.”
So, as the experts debate, what does it all mean for homeowners and those struggling to join them.
“Anyone who currently has a variable-rate mortgage should be pleased with this announcement because it is now more likely that the prime lending rate will drop in 2020, in which case variable mortgage rates would be likely to drop,” says Laird. “Directly following the announcement, the five-year Government of Canada bond yield dropped by more than five percent, suggesting that the market is starting to price in a rate drop. The falling bond yield suggests that fixed-rate mortgages may drop in the near term.
“Anyone looking to purchase a home in the spring of 2020 should get a pre-approval to understand how much they can qualify for and to hold today’s rates for the next four months. Consumers should also watch for lenders launching their spring promotions.”
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