The Bank of Canada kept its Overnight Lending Rate at 1% in today’s interest rate announcement and Monetary Policy Report. No big surprise there, as the rate has remained as such since September 2010. However, there is something notable about the most recent rate announcement - or rather, what’s not in it. For the first time since April 2012, the bank has not stated a forecast for when rates will rise - and it's because economists aren’t too sure. Originally expected to increase next year, it's now likelier that a rate hike won't occur until 2015 or 2016.
Typically, rate announcements include language on what’s in store for future rate movements based on the Bank’s growth forecasts for economic indicators like the housing market, export industry and inflation. However, recent political and economic upheaval in the U.S. has thrown a wrench in these carefully planned predictions.
U.S. Drama Creates Canadian Consequences
The recent events south of the border have left their mark; the U.S. economy took a $2.4-billion loss from their government shutdown, and almost hitting the debt ceiling really pushed their luck with global investor trust. Overall, the U.S. growth forecast has been lowered to 1.5% from 1.7% for 2013, and down to 2.5% from 3.1 next year. Because Canadian corporate spending historically increases along with U.S. growth, this means companies here could be sitting on their coffers for longer rather than pumping money back into the economy.
A weaker American economy also spells big trouble for our export industry, which was supposed to take centre stage as an economic driver late this year. However, this has been derailed as our biggest trading partner continues to experience a political impasse, which could lead to a second shutdown and new fears over debt default in the new year.
No Help From Abroad
This uncertainty has really put a damper on everything - even a brighter outlook for Europe and Asia is overshadowed by the American economic hiccup. While the BoC expects global factors to stabilize over the next year, they won’t improve fast enough to give our economy the boost it needs.
What Slow Economic Growth Means For You
As a result, the Bank also included a cut to Canada’s growth forecast, from 1.8 to 1.6%. While the numbers may seem small, even fractional differences in GDP growth can have big implications for our day-to-day lives.
- The Cost of Borrowing Stays Low: Keeping the Overnight Lending Rate at 1% means the Prime rate at Canada’s banks will stay at 3% - one of the lowest levels ever. While being able to borrow cheaply is positive for consumers, it also creates complacency, leaving them vulnerable to future rate increases. Rampant borrowing affordability is also a contributor to the non-stop price hikes felt throughout our housing market.
- No Change To Your Current Variable Loans: As mentioned above, Prime is staying put for the time being, so your monthly payments won’t change if you currently have a variable mortgage. And, now that the bank has softened its growth forecast, your rate may stay consistent for longer than previously thought.
- A Slow Economy Challenges The Job Market: Canada’s unemployment rate has hovered around the 7% mark for the past year, though it’s almost double that for young adult workers. Slow growth means businesses go into protection mode, and hiring new staff is less of a priority, making the job hunt that much harder for those looking for work.