Bank of Canada Maintains Overnight Rate At 1% – 4/12/2011


On 4/12/2011, 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 “stronger than the Bank had anticipated”:

• Aggregate demand is rebalancing toward business investment & net exports, and is expected to continue to rise rapidly.
• Consumption growth remains strong, and expected to become more in line with personal disposable incomes.

However, it warns that exports are still negatively impacted by the strength of the Canadian dollar, and “competitiveness challenges” (poor productivity).


Debt Concerns In Europe, Robust Growth From Emerging Markets

The BoC has observed that although there are “ongoing sovereign debt and banking challenges in the periphery” within Europe, growth has strengthened. The most recent debt concern in Europe has been over Portugal’s bailout.  The bank also warns that the diasters in Japan “will severely affect its economic activity” during the first half of the year. Short-term supply chain disruptions to advanced economies can be expected. Japan produces many of the world’s components for a wide range of industries (automotive, electronics, advanced materials, etc.).

The Bank of Canada also mentions that commodity prices have continued to be influenced by growth from emerging markets, and temporary supply shocks from recent unstable geopolitical events.  Price increases have been “contributing to the emergence of broader global inflationary pressures”. This month (4/5/2011), China has raised interest rates for the 4th time since October 2010, in an attempt to bring inflation under control.


Solidifying US Activity

The bank stated that in the“United States, growth is solidifying, although consolidation of household and ultimately government balance sheets will limit the pace of the expansion”.  In the beginning of April, U.S. employment grew for a second straight month in March.  Although still very high, the jobless rate hit a two-year low of 8.8%.


Leaving Monetary Stimulus In Place

The bank again stated that maintaining the overnight rate “leaves considerable monetary stimulus in place”, “in an environment of material excess supply in Canada”.  It also reiterated that any further 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 expect rates to increase some time during the year, especially as “The Bank expects that the economy will return to capacity in the middle of 2012”.


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).  However, fixed rate mortgages (FRM) have recently increased, with the 5yr closed at around 5.69% (with special rates around 4.44%).  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 (April 12, 2011) announcement:

The Bank of Canada’s next scheduled date for announcing the overnight rate target is May 31, 2011.

Thanks and Happy Investing!  – The Investment Blogger © 2011


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