BoC Leaves Key Rate Untouched at 1.00%

BOC The Bank of Canada startled no one today by leaving its key lending rate unchanged at 1.00%.

The BoC has been in a holding pattern for almost 10 months now, keeping prime rate at 3.00%—to the benefit of variable-rate mortgage holders.

A Reuters survey of 37 economists conducted prior to this announcement was unanimous in predicting today’s rate hold.

All eyes quickly focused on the BoC’s official statement. Analysts say it included more hints of a rate tightening mindset. Here are highlights from that report:

  • The BoC said that some monetary stimulus “will be withdrawn.” Its previous wording was “(will be) eventually withdrawn.”
  • “Total CPI inflation is expected to remain above 3 per cent in the near term”
  • “Core inflation is slightly firmer than anticipated”
  • “Core inflation is now expected to remain around 2 per cent over the projection horizon.”
  • “High” commodity prices and “persistent excess demand in major emerging-market economies are contributing to broader global inflationary pressures.”
  • “(Canadian) Household spending remains solid and business investment robust.”
  • “Financial conditions in Canada remain very stimulative”
  • “…the Bank expects growth in Canada to re-accelerate in the second half of 2011.”
  • Canada’s economy will return to “(full) capacity in the middle of 2012.”
  • “…there are clear risks” posed by the “European sovereign debt crisis”
  • Pending continued economic expansion and absorption in “the current material excess supply in the economy…some of the considerable monetary policy stimulus currently in place will be withdrawn.”

Despite awakening inflation and growing employment in Canada, economic risks are not dissipating. Those risks include a fragile North American economy, strong loonie and European debt concerns, to name a few. These factors combined have pushed back rate hike expectations until late 2011, or even the first half of 2012.

But some, like Citigroup Capital Markets, are still forecasting higher rates by October.

In a report released Monday, Citi analyst Todd Elmer forecasts the BoC will double its key lending rate to 2.00% by the end of the first quarter in 2012. Elmer said current expectations put too much weight on downbeat external factors and underestimate Canada’s consistently buoyant economic performance.

The financial market has thus far disagreed with economists like Elmer.

One proxy for market sentiment is trading in overnight index swaps (OIS). OIS trade based on expectations of interest rate changes. As of yesterday, they weren’t fully pricing in a 1/4 point rate hike until May 2012. Those expectations will shift closer to the beginning of 2012 after today’s more hawkish tone in the BoC’s statement.

BNN analyst Linda Nazareth suggests that economists may soon have to adjust their forecasts to keep up with market expectations. Within a month or so, she says, economists may take rate hikes “off the table” for 2011.

Three BoC rate meetings remain in 2011. The next interest rate decision will be on Sept. 7.

Steve Huebl and Robert McLister, CMT

  1. Wow. This is really crazy but expected this time around. I’ve been riding the variable – 0.75% for over two years and was at prime for about 6 months prior to that term being negotiated. Since I didn’t expect this to last more than a year tops I decided to pay extremely aggressive to chew up the principle and will continue to do so as my mortgage is literally disappearing. Any guesses on when it might make sense to try locking in a good fixed rate or has the really become a crap shoot due to all the other economies causing us to be stuck in netral.

  2. I doubt the B of C is going anywhere if core inflation stays below 2 percent. It can’t take the risk. Our biggest trading partner is on the verge of another recession!

  3. I think that rates will definitely increase come September with at least one more increase by the end of the year. Enough is enough already. Rates have been at record lows for the past 3 years even though the economy recovered. While there’s still risk from the U.S. and Europe and even a slow down in emerging markets, it’s not in the country’s interests to keep rates this low when there’s clearly no domestic justification for it. Even if we get another 1/2 to 1 point increase, interest rates would still be relatively lower than the historical average. The CDN$ has been nowhere near its record high of $1.10. In fact, up until now we’ve been in the range of 1.02 to 1.04. Even if the BoC raises rates and the CDN$ goes up, it likely won’t touch the record high. At some point we have to take a step back and let other countries do their part to push themselves out of the mud.

  4. We can not keep rates at these “emergency” levels as the emergency is gone. Too much cheap credit has been avail and too many people have piled into real estate that should not have done so. Also the US wants to have its currency devalued, this is the only way they can get rid of their debts. They do not care what the USD is valued against their supposed trading partners. They will export inflation around the world, as everything is priced in USD. USD goes down, everything relative will go up. Time to crank the rates back to a normal level. The argument that CDN can’t compete is hogwash, as look at Germany, they have a currnecy worth $1.40 to the USD and they still sell quite a bit to them and other countries as well.

  5. “The argument that CDN can’t compete is hogwash, as look at Germany, they have a currnecy worth $1.40 to the USD and they still sell quite a bit to them and other countries as well.”
    I’m confused, Earl. Why does the nominal rate of EURUSD tell us anything about whether or not the Euro is cheap?
    Would you have said, e.g. that if Germany returned to the Mark (1 Mark = 0.50 Euros), its currency would only be worth $0.70, making it easier for them to compete? Or that if Europeans moved to a DoubleEuro = 2 Euros = $2.80, that it would be more difficult for them?

  6. We are currently seeing a 1.8% core inflation, $100 barrel oil, a strong 1.05 cdn.dollar and BofC pegging our own 2nd Qtr. economic growth at dismal 1.5% of GDP and not to mention the economic bleeding going on internationally. The so called emergency rates are quickly becoming the new standard rates and the bond market is clearly reflecting such a viewpoint.

  7. If Canadians were taking this once in a lifetime opportunity to pay off debt as opposed to racking it up I’d feel a whole lot better, these low rates won’t last forever.

  8. Well in practice, consumer spending never play out as you describe. That’s like saying if we reduce the price of our products, people will buy less.
    If you’re concerned with Canadian’s spending and debt, invest your mammoth personal savings in a culture and country that mirrors your beliefs.

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