Aligned with nearly all Canadian economists' predictions, the Bank of Canada (BoC) left its key policy interest rate unchanged at 1.75 percent on March 6th. The figure represents the rate that Canadian banks charge for overnight loans to each other, and personal and commercial lenders typically follow the BoC's direction by increasing or decreasing its own rates accordingly. Those moves result in an incrementally higher cost of borrowing via mortgages, credit cards and business loans, for example.
Stephen Poloz, governor of Canada's central bank, had previously intimated that rates would be left alone in the wake of some bleak economic data reported through the end of 2018, and continuing into 2019. That tone translated to a neutral stance as Statistics Canada reported that gross domestic product (GDP) or the output of total goods and services in Canada, grew at a paltry 0.1 percent in the fourth quarter of 2018. Weak oil prices, trade wars, and a cooling housing market have put the brakes on GDP growth, projected at a total of 1.8 percent for 2018. And yet, analysts remain mixed as to whether the BoC's next move will involve a cut or a hike in rates at the next meeting.
Bank officials may have also viewed recent statistics surrounding personal debt and consumer spending as yet another reason to hold steady. With policy rates reaching historic lows on the heels of the global financial crisis in 2008-09, a series of decreases were implemented to stimulate buying and debt financing but as the recovery had progressed, bank officials dutifully kept a close eye on the prospects for inflation. Low rates apparently triggered a spate of borrowing among Canadians as household debt-to-income (DTI) ratios have increased significantly in the last decade.
DTI essentially measures the total amount of debt in a household versus after-tax income. If the auto loan and mortgage balance amount to $250,000 with a net income of $100,000, DTI would come in at a ratio of 2.5 to 1 (or $250,000/$100,000). In 2009, the average ratio in Canadian households sat at 1.58, and that figure had risen more than 10 percent to 1.75 through the end of 2016. In Vancouver and Toronto, the analysis revealed that resident borrowers had about twice as much household debt for total net dollars earned annually in the same time frame, according to Equifax.
With inflation pegged at 2 percent annually and perched above the benchmark BoC rate, financial markets stakeholders search for some indication on which direction future rates might head. Government policymakers await further economic cues into the first half of 2019, and a minority faction of economists view a cut on the horizon— and soon. Gregory C Mason, associate professor of economics at the University of Manitoba, sees an easing of rates in the future and expects that move to occur in the July meeting of the BoC.
Until then, Canadian consumers and businesses can expect variable rates to remain level unless Bay Street mavens sense a strong turnabout in the central bank's language leading up to the mid-summer gathering.