In its fifth interest rate announcement of 2016, the Bank of Canada (BoC) held its target for the overnight rate at 0.5 per cent. This wasn’t a surprise to economists or analysts, who had predicted low interest rates for the remainder of 2016 and possibly into 2017 in order to maintain stability and promote spending in increasingly uncertain times, especially with the Brexit vote still visible in the rear view mirror.
The BoC also released the third Monetary Policy Report of the year, which outlines the Bank’s base-case projection for inflation and growth in the Canadian economy, and its assessment of risks. Household spending is expected to increase moderately, supported by continued employment growth in the non-resource sector and federal fiscal measures such as the Canada Child Benefit. There are some uncertainties that could shake this expectation however, including “lacklustre” consumer sentiment in the energy-producing provinces; an increase in household debt and the resulting potential increase in sensitivity to any shocks; and vulnerabilities in the housing market, increasing the likelihood and severity of cutbacks in spending if a house price correction were to take place.
The report also notes that strong demand supports “robust” new construction and resale housing activity in British Columbia and Ontario, partly due to population and employment growth in those provinces – the same reasons thought to be behind the housing price increases in these regions. The report notes, however, the possibility that the skyrocketing prices in Toronto and Vancouver may also be driven by self-reinforcing expectations, which means that they’re more sensitive to any kind of sudden shock that would disrupt housing demand. “Over the projection horizon, the contribution of residential investment to real GDP growth is anticipated to decrease and household sector vulnerabilities to stabilize,” the report states.
Interest rates affect much more than mortgages, and one of the BoC’s primary functions is to preserve the value of money by keeping inflation stable and predictable. The Bank believes that the risks to the inflation target are pretty balanced, although there was a nod to the uncertain fallout from Brexit as well as the continued financial vulnerabilities in the greater Vancouver and Toronto areas. “Above-potential” GDP growth is projected for the remainder of 2016.
The Bank Rate is .75 per cent and the deposit rate is .25 per cent. The next interest rate announcement is scheduled for September 7.
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