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No Change for Key Rates

clip_image001The Bank of Canada met today and saw no reason to move its key lending rate from 1.00%, where it has been for a little over a year.

That’s precisely what the market anticipated and it means prime rate (which is the basis for variable mortgage rates) should remain at 3.00%.

The BoC’s decision comes amid ongoing economic danger in Europe, sputtering U.S. growth and surprising inflation here at home (core inflation hit a three-year high in September).

Here’s a sampling of the Bank’s commentary from this morning:

  • “The global economy has slowed markedly…”
  • The Bank now expects that “…the euro area…will experience a brief recession.”
  • “the Canadian economy (is) now expected to return to full capacity by the end of 2013” (it was previously mid-2012)
  • “core inflation is expected to be…declining through 2012”
  • Canada’s “financial system (is) functioning well”
  • “there is considerable monetary policy stimulus in Canada”

The bank left out language about potential rate hikes or cuts, but slashed its 2012 Canadian growth forecast from 2.6% to 1.9%.

With a commitment from the U.S. Fed to keep its policy rates “exceptionally low” until mid-2013, there is little expectation that the BOC will diverge and raise rates substantially before then.

The bank also hinted that if the euro-area crisis is not contained, that could be a reason to lower rates here.

According to the current Big 6 bank consensus forecast, 2012 should see a 50 bps increase in prime rate. Financial markets don’t believe that, however, with derivatives traders effectively pricing in no change by the Bank of Canada in the next year.

The final BoC rate meeting for 2012 is December 6.

5-year bond yields, which guide fixed mortgage rates, fell 10 bps after the BoC’s announcement (as of this writing).

Steve Huebl & Rob McLister, CMT