Bank of Canada holds benchmark interest rates steady, updates its economic outlook

Economic Insights Raymond Walia 10 Jun

This morning, in its fourth announcement of 2021, the Bank of Canada left its target overnight benchmark rate unchanged at 0.25%. As a result, the Bank Rate stays at 0.5%. It also provided somewhat encouraging thoughts on the state of, and outlook for, the Canadian and global economies and updated its outlook on inflation. Here is a summary:

Canadian economic conditions

  • Economic developments have been broadly in line with the Bank’s outlook published in the April Monetary Policy Report
  • First quarter GDP growth came in at a robust 5.6% and while this was lower than the Bank originally projected, “the underlying details indicate rising confidence and resilient demand”
  • Household spending was stronger than expected, while businesses drew down inventories and increased imports “more than anticipated”
  • Economic activity so far in the second quarter has been dampened, largely as anticipated, due to renewed lockdowns associated with the third wave of COVID-19 and recent jobs data show that workers “in contact-sensitive sectors” have once again been negatively affected

Inflation

  • CPI inflation has risen to around the top of the Bank’s 1-3% inflation-control range, due largely to base-year (2020) effects and much stronger gasoline prices
  • Core measures of inflation have also risen, due primarily to temporary factors and base year effects, but by much less than CPI inflation
  • While CPI inflation will likely remain near 3% through the summer, it is expected to ease later in the year, as base-year effects diminish and excess capacity continues to exert downward pressure

Global conditions

  • With COVID-19 cases falling in many countries and vaccine coverage rising, global economic activity is picking up
  • The US is experiencing a strong consumer-driven recovery and a rebound is beginning to take shape in Europe, while a resurgence of the virus is hampering the recovery in some emerging market economies
  • Financial conditions remain highly accommodative, reflected in broadly higher asset prices

Looking forward

Despite progress on vaccinations, there continues to be uncertainty about the evolution of new COVID-19 variants. However, with provincial containment restrictions on an easing path over the summer, the Bank still expects the Canadian economy to rebound strongly, led by consumer spending. Growth in foreign demand and higher commodity prices should also lead to a solid recovery in exports and business investment, according to the Bank.

With respect to the housing market, the Bank’s only comment was that “activity is expected to moderate but remain elevated.” In April, the Bank opined that housing construction and resales were at historic highs, “driven by the desire for more living space, low mortgage rates, and limited supply” and noted that it would continue to monitor the potential risks associated with the rapid rise in house prices.”

Policy measures

The BoC’s Governing Council noted that there remains considerable excess capacity in the Canadian economy, and that the recovery continues to require “extraordinary monetary policy support.”

Accordingly, the Bank said it remains committed to holding its policy interest rate at what it calls the effective lower bound until economic slack is absorbed and its 2% inflation target is “sustainably achieved.” This may happen sometime in the second half of 2022.

As well, the Bank reiterated that it would continue its Quantitative Easing program – at a target pace of $3 billion per week – to keep interest rates low across the yield curve. It also added that: “Decisions regarding adjustments to the pace of net bond purchases will be guided by Governing Council’s ongoing assessment of the strength and durability of the recovery. We will continue to provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation objective.”

The bottom line

Today’s announcement falls under the heading no news is good news. The benchmark rate is unchanged, the economic recovery appears to be unfolding largely as expected and bond buying activity will continue to provide monetary policy support in the near term.

All of this suggests now is a good time to borrow but also with a view toward developing mid to long-term financing strategies that will address future conditions including the potential for policy interest rate increases next year. First National is here to help.

Published by: First National

Residential Market Commentary – Bank of Canada steps up to the bully pulpit

Economic Insights Raymond Walia 26 May

In its latest look at the threats to the country’s financial system, the Bank of Canada puts household debt and imbalances in the housing market at the top of the list.

The Bank says these are not new problems, but they have intensified during the pandemic.  Consumer debt has actually dropped in the past year or so, but rising mortgage debt has more than offset that decline.  At the end of last year Statistics Canada reported that the household debt-to-income ratio stood at 170.7, or $1.71 of debt for every $1.00 of disposable income.

The housing boom has been supporting the overall economy in the short-term but it is also adding to the vulnerability of the economy and financial system.  The BoC is also expressing concerns about the declining quality of mortgage borrowing during the pandemic.

The key concern is that any significant economic shock that leads to loss of employment, a drop in income, or a sharp reduction in home prices would force “overstretched” households to cut other spending in order to make their mortgage payments.  That, in turn, would curtail the economy as a whole, and could put significant stress on the financial system.

Just because the central bank says there could be a problem, does not mean there will be a problem.  There are a number of market watchers who see the Bank using its annual Financial System Review as a bully pulpit in an effort to talk down overly exuberant market expectations that might lead to trouble.

Other key concerns include cybersecurity, too much reliance on cheap credit and the possibility of a premature withdrawal of pandemic support for businesses

Published by – First National Financial LP