The Bank of Canada made its first rate announcement and monetary policy report (MPR) of 2017, with the suspicions of most experts confirmed: the overnight rate target has been held at .5 per cent. The Bank Rate is correspondingly .75 per cent and the deposit rate is .25 per cent.
As with recent BoC cate announcements, the expectation was for the rate to remain the same because of the uncertainty surrounding the global outlook, especially when it comes to certain policies that will emerge from the United States in the coming months.
In his opening remarks of the MPR press conference, BoC governor Stephen S. Poloz touched on some important points that went into the decision, including a brief tidbit regarding some potential U.S. policy changes and the impact on mortgage rates.
mortgage rates have already risen in response to higher bond yields, which will act as an additional drag on housing demand in Canada.”
Mortgage interest rates and the impact on Canada’s overall GDP were also briefly mentioned in the MPR. “Mortgage interest rates have increased since October, mainly reflecting higher funding costs. As in October, the Bank estimates that the impact of the federal government’s tighter housing-related measures will subtract 0.3 per cent from the level of real GDP by the end of 2018.”
Another point in the projection about the economy is around the expected effects of domestic fiscal stimulus – the BoC expects Canadians to keep spending.
Although the changes to housing finance rules and mortgage interest rates have risen due to higher bond yields have both contributed to a slowdown in residential investment and activity that will continue as the year goes on, there is still growth expected in 2017, helped by federal and provincial fiscal measures.
Overall, the global economy is strengthening largely as expected and prices of some commodities, including oil, have risen. Canada’s economy continues to operate with “material excess capacity.” Even though employment growth has remained firm, there is still “significant slack in the labour market. The resource sector’s adjustment to past commodity price declines appears to be largely complete, but negative wealth and income effects will persist.” The Canadian dollar has strengthened along with the US dollar against other currencies, which creates some challenges when it comes to competition and exports. The BoC projects that Canada’s real GDP will grow by 2.1 per cent in both 2017 and 2018. This implies a return to full capacity around mid-2018.
Largely, the BoC’s projections were in line with the last announcement in October. The U.S. election was the only major event that took place since then, and Poloz emphasized that we haven’t even seen the true impact of that yet.
“Fundamentally, not much has changed since then,” Poloz said.
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