On 12/7/2010, The Bank of Canada (BoC) announced it is maintaining its overnight interest rate at 1%. The Bank Rate is correspondingly 1.25% and the deposit rate is 0.75%.
Canada’s weak net exports & productivity
The move reflects the central bank’s observation that economic activity in Canada has been slightly weaker than it projected in October, due to weak net exports and productivity (declines in GDP). The strength of the Canadian dollar has also been a factor negatively affecting exports. Household spending was stronger than the bank had anticipated, and the economy is still considered to be recovering at a modest pace.
Concerns of increased sovereign debt risk
Even though the data showed a modest recovery in Europe, there were concerns of increased sovereign debt risks in Europe, which may trigger more problems for the global financial system.
Recently, Ireland’s $115 billion USD bailout, and further concerns regarding the financial position of Portugal, Spain, and Hungary, have left the euro zone in a less stable state. There has been talk about a euro bond or e-bond among the European finance ministers. The proposal would require Europe’s wealthier economies, such as Germany, to co-sign loans for weaker European Union countries. Germany, Austria, and the Netherlands, rejected the proposal.
The bank expects growth and the economic recovery in emerging markets to continue to slow to a more sustainable, but robust pace. Emerging nations have intervened to limit capital inflows, which have helped cool their economies to a small degree.
In the U.S. private domestic demand has been slowly increasing, as the bank expected. However, the U.S. economy is still relatively week. On Sunday (12/5/2010), Ben Bernanke indicated he is open to further quantitative beyond the $600 billion announced in November.
Leaving monetary stimulus in place
The bank stated that maintaining the overnight rate “leaves considerable monetary stimulus in place”, “in an environment of significant excess supply in Canada”. It also stated that any further reduction in monetary stimulus would require carefully consideration. This indicates that rates may be maintained for some time longer, as any increases would be detrimental to the Canadian economy and recovery.
Impact to investors & individuals
The rates are still very low in Canada, and it leaves a good opportunity to secure relatively cheap credit (mortgages as well as other lines of credit). The 5 year fixed mortgages are still relatively low, although variable rates are not quite as attractive as they used to be one to two years ago.
We can expect rates to continue to stay relatively low for some time. Rates will not rise significantly until the economy is strong enough to support much higher rates (if the economy suddenly picks up more than it has been). If that does happen, increases of 0.25% would not be unexpected. But a single increase would not have too much of an impact to borrowing costs or cash flow.
The next scheduled date for announcing the overnight rate target is January 18, 2010.
Bank of Canada: