Bank of Canada Maintains Overnight Rate At 1% – 3/1/2011


On 3/01/2011, 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).


Canada’s Recovery & Rebalancing Of Demand

The move reflects the central bank’s observation that economic activity in Canada has been proceeding “slightly faster than expected” compared to its previous projections:

• Consumption growth remains strong, and signs that spending is moving more in line with household incomes.
• Businesses are taking advantage of stimulative financial conditions, and continue to expand.
• Evidence of recovery in net exports, with strong US activity and global demand for commodities.

However, it warns that exports are still negatively impacted by the strength of the Canadian dollar, and poor productivity.


Debt Concerns In Europe, Robust Growth From Emerging Markets

The BoC warns that continued “challenges associated with sovereign [debt] and bank balance sheets” in Europe remain.  Euro Zone finance ministers have remained especially concerned over Portugal, Spain, and Greece’s financial condition. The pace of the European recovery will be limited and and uncertain.  This outlook has not changed from the last BoC rate decision.

The Bank of Canada has observed that commodity prices have continued to be influenced by growth from emerging markets, and temporary supply shocks from recent unstable geopolitical events.  Also, China has continued to tighten their monetary policy and raise its banks’ required reserves.  It has raised the required reserves five times since October 2010, to battle inflation.


Solidifying US Activity

The bank stated that “U.S. activity is solidifying and remains supported by stimulative fiscal and monetary policies”.   In December 2010, US Federal Reserve chair Ben Bernanke indicated he was open to further quantitative beyond the $600 billion announced in November 2010.


Leaving Monetary Stimulus In Place

The bank again stated that maintaining the overnight rate “leaves considerable monetary stimulus in place”, “in an environment of significant excess supply in Canada”.  It also reiterated that any further reduction in monetary stimulus would require careful consideration.  This indicates that rates may be maintained a bit longer, as any increases would be detrimental to the Canadian economy and recovery at the present moment.  However, we can expect rates to increase some time during the year, especially as the BoC has now observed the rebalancing of domestic private demand.


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).  The 5 year fixed rate mortgages (FRM) remain attractively low.  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.

Lending 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.  But a single increase would not have too much of an impact to borrowing costs or cash flow.


The Bank of Canada’s next scheduled date for announcing the overnight rate target is April 12, 2011.

Thanks and Happy Investing!  – The Investment Blogger © 2011


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