The Bank of Canada stated it would keep the Overnight Lending Rate at 1% in today’s Rate Announcement - and that an increase may be further in the future than previously thought.
The Rate has remained at this level since September 2010 in efforts to ease the cost of borrowing for Canadians and encourage consumer spending - a vital force behind economic growth.
Lack of change in the rate is hardly a surprise; it was fully expected that the Bank would maintain its stimulus efforts, especially in light of recent Statistics Canada data that showed economic growth was slower than it should have been in 2012, at only 1.8%.
The BoC confirmed this as a factor, stating that, “With continued slack in the Canadian economy, the muted outlook for inflation, and the more constructive evolution of imbalances in the household sector, the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required, consistent with achieving the 2% inflation target.”
It’s the BoC’s way of saying that until significant recovery is seen in economic growth and targets for inflation are achieved, interest rates will stay put.
While the data shows that household spending grew at a modest rate, a weakening housing market, struggling export industry, strong Canadian dollar and slow GDP are cause for low growth rates.
However the Bank is optimistic these areas will show improvement over the coming year, stating, “The Bank expects growth in Canada to pick up through 2013, supported by modest growth in household spending combined with a recovery in exports and solid business investment.”
This leads to a new expectation that a rate hike may occur in early 2014.
Lack of movement from the BoC is also a method to protect Canada’s economy from turbulent economic conditions worldwide, saying that while “conditions remain stimulative”, they’re also volatile.
The U.S. is recovering from the recession at a moderate, though gradual pace, despite lingering uncertainty over its fiscal policy. Chinese growth has improved, though other emerging markets continue to struggle, and Europe remains mired in their recession woes.
The Bank’s Overnight Lending Rate is used as an indicator by all Canadian banks when setting their own cost of borrowing, amongst themselves, and for the consumer. Keeping the rate at 1% makes it cheap for banks to engage in overnight borrowing from each other, a practice that keeps the flow of money liquid throughout our banking institutions, and therefore easier for consumers to obtain credit. The rate is also used as a base for variable mortgage rates, which rise and fall along with the cost of borrowing - those homeowners can rest easy knowing their monthly mortgage payments won’t be in for a rise any time soon.