Today’s Bank of Canada (BoC) interest rate decision was reassuring for variable-rate borrowers.
- The Bank announced that Canada’s key lending rate will remain just 75 basis points above its all-time low.
- The Bank suggested its next move is just as likely to be a rate cut as a rate hike.
- It said the risk of falling inflation “has grown in importance” and that inflation won’t rise back to its target for “about two years” (suggesting even less chance of a prime rate increase through 2015).
Even if inflation does return to its 2% target, that alone isn’t enough reason for the Bank to raise rates.
So essentially, it’s Pleasantville right now for variable-rate borrowers, with no hikes in sight.
In terms of what it would take for the BoC to actually lower rates, it would likely need at least 2-3 more months of weak economic data (be it falling exports, business investment, inflation or employment).
Fixed income traders believe that could happen. They’re now betting more heavily on a rate cut by October than a rate hike or no change combined. That reflects a key change in market-wide rate expectations over the last month.
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Economists, as is often the case, have a different opinion. Those polled by Reuters expect the next rate move to be an increase in mid-2015. (Source: Globe and Mail)
The next Bank of Canada rate meeting is March 5.
- “It’s probably as dovish as they could go without adopting an outright easing bias.”—David Tulk, TD Securities (BNN)
- “The economy is fragile because it relies highly on just one thing…housing.”—BoC head Stephen Poloz (BNN)
- “…Interest rates…will need to stay low longer than we thought…”— Stephen Poloz
Rob McLister, CMT