Adjustable-rate mortgage holders will have to wait at least until November at the earliest for any chance of seeing their interest rates drop.
That’s because the Bank of Canada (BoC) left its key lending rate unchanged at 1.75% on Wednesday. When this rate changes, it almost always affects the prime rate, which is the basis for adjustable mortgage rates and lines of credit.
The Bank is stuck in wait-and-see mode. In its statement, the bank suggested it must balance the mostly positive domestic economy with deteriorating economic conditions abroad. And global trade battles are a wildcard that could reward or punish the BoC for making the wrong rate decision.
“Canada’s economy is operating close to potential and inflation is on target,” it said, adding that GDP, inflation and housing activity exceeded the bank’s forecast in recent weeks. That’s not typically an environment where you see rate cuts.
Global economic conditions are another story.
U.S.-China trade relations have continued to deteriorate and business investment is weakening—both of which are “taking a toll” on the Canadian economy, the bank said. (Albeit, the U.S. and China have since agreed to face-to-face meetings next month, which is helping lift rates across the globe.)
“In this context, the current degree of monetary policy stimulus remains appropriate,” the BoC said in explaining its decision to hold rates. But in the coming months, the bank will “pay particular attention to global developments and their impact on the outlook for Canadian growth and inflation.”
In recent months the market has increased bets that the bank will be forced to cut rates. It’s deemed an “insurance” move to get ahead of economic turbulence.
Some had expected the bank to signal a rate cut by the end of the year, but it instead struck a more neutral than dovish tone.
"The Bank of Canada left rates where they were, and drafted a statement designed to give them some time to think about what to do next, rather than dropping a clear hint of an October cut," noted Avery Shenfeld, CIBC’s chief economist. Though, he expects the bank will eventually be forced to drop rates.
Others, like TD Bank economist Brian DePratto, read the bank’s statement differently, suggesting a rate cut at the bank’s October 30 meeting is still likely.
“Reading between the lines, nearly every positive note in today's statement was balanced by a qualifier," DePratto wrote. "Even if the Bank of Canada has not telegraphed an October rate, we believe the backdrop makes it the most likely outcome."
Markets are currently pricing in about a 50% chance that Canada’s overnight rate falls in October. A rate cut by year-end is a near certainty based on money market derivatives pricing. But traders have been wrong before.