CANADA – In line with financial market expectations, the Bank of Canada announced on March 7, 2018 it was keeping its trend-setting overnight lending rate unchanged at 1.25%.
Here are the four main reasons why the Bank held interest rates steady:
- Fourth quarter Canadian economic growth came in weaker than expected.
- That means inflationary pressures are lower than it expected when it updated its economic forecast in January
- Wage growth is lower than it would normally be for an economy with no labour market slack.
- The Bank likely wants to see stronger wage growth before it raises interest rates to prevent an upward wage-price spiral.
- The Bank wants more time to gauge the impact on housing markets from recent federal and provincial policy measures.
- Housing is an important part of the Canadian economy.
- If housing activity softens by more than the Bank expects, that could mean weaker Canadian economic growth than the Bank has forecast.
- Weaker economic growth could mean lower than expected inflationary pressures and less need for the Bank to raise interest rates.
- Increasing uncertainty among Canadian businesses stemming from U.S. tariffs and the renegotiation of NAFTA. That uncertainty means businesses may decide to put off making investments in their business, which could weaken the outlook for Canadian economic growth and inflation.
The Bank has repeatedly said it will continue to raise interest rates; however, it wants to see a number of economic developments that point to higher inflation before it raises interest rates further.
As of March 7, 2018, the benchmark five-year lending rate stood at 5.14%, unchanged from the time of the Bank’s January 17, 2018 announcement but up a half-point from a year earlier. As of January 1, 2018, all mortgage applicants must qualify for financing based on no less than the benchmark five-year lending rate.
Canada’s major chartered banks raised their advertised five-year fixed mortgage interest rates in January to between 3.54% and 5.14%. These rates have not changed since then, but actual five-year fixed mortgage interest rates may be negotiated below lenders’ advertised rates depending on mortgage applicants’ creditworthiness and the degree to which they do other banking business with the mortgage lender.
The next interest rate announcement will be on April 18, 2018. It will be accompanied by The Monetary Policy Report, which updates the Bank’s economic forecast.
