As most economists had predicted, the Bank of Canada has held its overnight interest rate at 1.75%. This is the sixth straight time the Bank has held rates steady at this level.
It’s a big sigh of relief for indebted Canadians worried about their borrowing costs, and it seems the risk of a rate hike may be off the table for the rest of 2019.
In its statement after the announcement, the Bank says “Following temporary weakness in late 2018 and early 2019, Canada’s economy is returning to growth around potential, as expected. Growth in the second quarter appears to be stronger than predicted due to some temporary factors, including the reversal of weather-related slowdowns in the first quarter and a surge in oil production. Consumption is being supported by a healthy labour market.”
This is starkly different than at the end of 2018 when many were expecting up to three rate hikes in 2019. That is no longer the expectation.
Global trade tensions remain top of mind for the Bank of Canada governor Stephen Poloz and his deputies. Calling it the, “biggest downside risk to the global and Canadian outlooks.” Canada has, so far, fared well despite the ongoing trade wars between the U.S. and China and with tariffs and bans levied from both of those countries as well. China and the U.S. are the two biggest economies in the world. Canada’s economic survival in the face of this adversity is a big vote of confidence.
The Bank says, “Evidence has been accumulating that ongoing trade tensions are having a material effect on the global economic outlook. The Bank had already incorporated such negative effects in previous Monetary Policy Reports (MPR) and in this forecast has made further adjustments in light of weaker sentiment and activity in major economies. Trade conflicts between the United States and China, in particular, are curbing manufacturing activity and business investment and pushing down commodity prices.”
But the Bank is holding rates, despite central banks around the world cutting or hinting at cutting rates to stimulate growth. That includes the U.S. Federal Reserve.
In a note titled “BoC not ready to follow the Fed lower (yet),” RBC Senior Economist Josh Nye says, Bank of Canada governor Stephen “Poloz and Co. still don’t appear to be in any rush to lower rates.” This, as Nye notes too, is different than what is happening globally. Just this morning, U.S. Federal Chairman, Gerome Powell made comments hinting a July rate cut is likely for the U.S. In his note sent to journalists after the announcement, BMO economist Benjamin Reitzes says his key take away is “the BoC sounded a bit more dovish today. It's clear that the trade backdrop is a significant concern for the BoC and is the single largest downside risk...that's hard to argue with. Despite the downgrade to the outlook, it's going to take a deeper deterioration to spark conversations about easing even as the Fed seems poised to lower rates at month end.”
Meantime, in Canada, the current rate accommodation remains appropriate, according to the Bank.
The Bank notes that “the outlook is clouded by persistent trade tensions.” It adds, “As Governing Council continues to monitor incoming data, it will pay particular attention to developments in the energy sector and the impact of trade conflicts on the prospects for Canadian growth and inflation.”
Even as the Bank of Canada holds rates steady, consumers should continue to shop around as many lenders currently offer extremely competitive five-year, fixed-rate mortgage products.
The next rate announcement is scheduled for September 4, 2019.