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The BoC’s Magic Number

Apart from the abhorrent incident on Parliament Hill, today’s BoC rate announcement was relatively dull. The bank left the key interest rate untouched, something we’ve seen for the last 33 rate meetings (and counting).

But one thing it did do was reinforce a key number: 2%. Two percent is the Bank of Canada’s

  1. Inflation target
  2. Long-term economic growth estimate
  3. Long-term inflation outlook

These three figures (more specifically, the inflation target, growth and core inflation) are primary drivers of Canadian mortgage rates. Here’s more on what the bank said about each in its statement today:

  • Canada’s real GDP growth is projected to reach 2% “by the end of 2016.”
  • “Both core and total CPI inflation are projected to be about 2% on a sustained basis.”

This is a long-term projection that demonstrates the BoC’s confidence in its ability to control inflation, as it has successfully done for over 20 years. Two percent growth and 2% inflation, if they pan out over the long-run as the bank suggests, would be nowhere near enough to trigger significant sustained rate increases.

  • “…The financial stability risks associated with household imbalances are edging higher.”

This statement should concern everyone from an economic standpoint and mortgage professionals from a business standpoint. Overleverage may help keep interest rates low, but housing policy-makers won’t stand idly by if household debt and home prices (in Canada’s biggest cities) continue to make record highs.


Despite core inflation exceeding Canada’s 2% target, “underlying inflationary pressures are muted,” the BoC says, adding that inflation risks remain “balanced.”

That, of course, suggests that rate changes are nowhere on the horizon, and financial markets agree. Money market traders are not pricing in a rate hike until 2016, not that anyone should rely on that.

The final Bank of Canada rate meeting of 2014 will be December 3.

Source of Canadian home price chart: CREA
Source of Household leverage chart: StatsCan

Rob McLister, CMT