On 5/31/2011, The Bank of Canada (BoC) announced it is maintaining its overnight interest rate at 1%. The Bank Rate is correspondingly 1.25% (1 1/4 percent) and the deposit rate is 0.75% (3/4 percent).
The move reflects the central bank’s observation that “economic expansion is proceeding largely as expected”:
• Continued strong business investment.
• Smaller consumer consumption and government spending.
• Slight negative impact from exports.
It also notes that “temporary supply chain disruptions are expected to restrain growth sharply in the current quarter” but the Bank expects it to be less of an impact in subsequent quarters.
The BoC made the following observations on the global economy:
• Modest growth of U.S. economy continues but is limited by the consolidation of household balance sheets.
• Growth in Europe continues, but the risks related to peripheral economies have increased.
• The disaster in Japan are severely affecting its economic activity, and resulted in temporary supply chain disruptions in advanced economies.
• Tight global supply and strong demand of commodities from emerging markets, contributing to broader global inflationary pressures.
“Despite the challenges that weigh on the global outlook, financial conditions remain very stimulative”.
Leaving Monetary Stimulus In Place, But Eventually Withdrawn
The bank again stated that maintaining the overnight rate but warns “To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be eventually withdrawn”.
It also reiterated that such a reduction in monetary stimulus would require careful consideration. Any increases would detract from the Canadian economy and recovery at the present moment. Although rates have been maintained a bit longer, we can still expect rates to increase some time during the year, especially as the Bank expects a return to capacity by “middle of 2012 as excess supply in the economy is gradually absorbed, labour compensation growth stays modest, productivity recovers and inflation expectations remain well-anchored“.
Impact to investors & individuals
Rates are still very low in Canada, providing opportunity to secure relatively cheap credit (mortgages as well as other lines of credit). Fixed rate mortgages (FRM) have recently decreased, with the 5yr closed around 5.59% (with special rates around 4.24% – 4.34%). Although variable rate mortgages (VRM) are not quite as attractive as they used to be (1- 2 years ago), we can expect them to begin to increase as well, making FRMs more attractive going forward.
Tightening of credit has already begun, particularly in mortgage lending as we expected. We can look forward to more credit tightening policies by the end of the year, even as rates continue to stay relatively low for a bit longer.
The BoC rates will not rise significantly until the economy is strong enough to support it. If the pace of economy recovery becomes more healthy (signs are appearing), then increases of 0.25% would not be unexpected. A single increase would not have too much of an impact to borrowing costs or cash flow. However, remember that retail banks have and will raise rates before the BoC does.
The Bank of Canada (May 31, 2011) announcement:
The Bank of Canada’s next scheduled date for announcing the overnight rate target is July 19, 2011.
Thanks and Happy Investing! – The Investment Blogger © 2011