Bank of Canada Announcement - July 2016

Posted on 13 July, 2016

The Bank of Canada announced today that their overnight lending rate will remain unchanged at 0.5 percent. Variable rate mortgage-holders will also see no change in their mortgage payments, as the prime rate at Canadian lending institutions continues to sit at 2.7 percent for the time being.

This decision comes largely as expected, with Canadian Economists predicting the rate to hold steady for quite some time. According to CIBC Economist Nick Exarhos, the Bank has been using ‘stronger’ language regarding their concern over both the Vancouver and Toronto housing markets, suggesting reluctance to cut interest rates further.

TD Economist Brian DePratto adds that “while Canada has faced its share of unanticipated bumps this year, most are expected to prove temporary and, thus, have not taken the Bank of Canada meaningfully off course. That said, these bumps reinforce the expectation that the Bank of Canada’s foot will remain firmly on the accelerator, with the benchmark overnight rate likely to be held at 0.5 percent for some time to come.”

While GDP grew unexpectedly in quarter one of 2016, it is expected to have contracted by a total of 1 percent in the second quarter. The Alberta wildfires, uneven consumer spending and volatile trade flows have all contributed to this negative growth.

Outlook for the third quarter remains optimistic, with a projected increase to 3.5 percent as Fort McMurray begins rebuilding and oil production resumes. The Bank also expects consumer spending to increase due to the new Canada Child Benefit, which is to be introduced later this month.

Although oil prices have already increased by almost ten dollars US per barrel since April, the Bank cites that levels are still below what many oil producers would require to break even, and are certainly not high enough to invoke profitable new investments into oil sands projects.

Globally, the Bank has stated that Brexit could also downgrade Canada’s GDP by a modest 0.1 percent over the course of the next few years, as Canada’s direct trading relationship with the United Kingdom accounts for just 3.5 percent of Canadian exports.

According to this month’s Monetary Policy Report, the Bank expects inflation to return to the 2 percent target near the end of 2017, pushed back slightly from their April projection. Estimated growth for 2016 was lowered to 1.3 percent from the 1.7 percent predicted in April, due to weaker investment and export outlooks. Growth for 2017 was also downgraded slightly to 2.2 percent from the 2.3 percent forecast earlier this year.

The next Bank of Canada announcement is scheduled for September 7, 2016, and the next Monetary Policy Report is to be released in October of this year. Be sure to follow our blog for the latest information on the Canadian housing market, interest rates and the most common mortgage topics, and feel free to call our office at (780) 416-1085 for answers to any questions you may have.

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