by Ray Kar, June 5, 2019
The Bank of Canada (BOC) last week held it’s rate at 1.75 per cent. The bank indicated that economy has recovered from an earlier slowdown. The bank said there is “accumulating evidence” that the economy bounced back in the second quarter. It cited a long list of positive signs, including the “beginning” of a recovery in the oil sector, a “more stable” national housing market, continued strong job growth, a pick-up in consumer spending, higher exports and a firming in business investment.
While the domestic economy has improved. The global economic environment remains uncertain, with trade tensions being a critical issue. The bank says the “escalation of trade conflicts is heightening uncertainty about economic prospects” and that new Chinese trade restrictions are having “direct effects” on Canadian exports.
The rate announcement marks the fifth straight time the bank has kept its key rate unchanged after a series of hikes in 2017 and 2018. The Bank in the past has stated that it intends to raise rates to a neutral state (a state that neither stimulates or diminishes economic activity). The bank’s estimate of neutral is 2.25 per cent to 3.25 per cent. The Banks language in the recent past has not indicated any urgency in hitting this target, stating it would only go as far as the data suggests it would be prudent to do so.
Most rate watchers (bankers, economist, investors, business executives, etc.) now expect the Bank not to raise rates at the earliest until some point in 2020. Further, a substantial subset of these market watchers, expect the Bank may cut interest rates if the US Fed lowers it’s benchmark rate, which it may due as early as this September.
This follows comments from Federal Reserve Chairman Jerome Powell who signaled on Tuesday an openness to cut interest rates if necessary, pledging to keep a close watch on fallout from a deepening set of disputes between the U.S. and its largest trading partners.
The Banks announcement suggests mortgage rates should remain close to were they are now for a prolonged period. The 5 year closed fixed rate can be had currently in the low 3 per cent, and in some cases slightly below 3 per cent.