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Bank of Canada Lowers Rates? Not this Time.

January 20, 2016

On January 20th, in the face of a plunging Canadian dollar and precipitous decline in the price of oil; the Bank of Canada kept their overnight lending rate unchanged.

While some analysts were predicting that the Bank of Canada would decrease their overnight lending rate, other critics expressed concerns about what another rate cut would do to an already challenged Canadian Dollar.

In the January release, The Bank of Canada specifically mentions three key factors in their decision to keep their key lending rate, the overnight lending rate, unchanged.

Inflation, the Canadian & global economies, and the price of oil.

According to the Bank of Canada, inflation appears to be within their expected target range. Specifically, lower energy prices work to keep inflation in check – although higher prices of imported goods act to put inflationary pressure on the Canadian dollar. Total CPI inflation “remains near the bottom of the Bank’s target range…” and the Bank of Canada anticipates some recovery in both energy prices and the currency to put inflation on track for 2 per cent by early next year.

Globally, the Bank of Canada cites a continued strength in the U.S economy (despite an admitted weakness in Q4 2015) as the Federal Reserve in the United States considers further rate increases and weens off of quantitative easing. The Chinese economy continues to undergo a transformation from an industrial/manufacturing based economy to a services or consumer based one. Although stock markets world-wide (among other asset classes) have taken a down-turn, the Bank of Canada still expects global growth this year.

Locally, the Bank of Canada predicts a 1.5 per cent growth rate and 2.5 per cent growth in 2016 and 2017 respectively. Interestingly, the BoC also included the following statement:

“However, the Bank has not yet incorporated the positive impact of fiscal measures expected in the next federal budget.”

Possibly implying that the Bank of Canada may expect the federal government to include some monetary stimulus in the next federal budget that has not yet been announced.

Oil and other commodities continue to experience depressed prices. The Bank of Canada expects that a “…reorientation towards non-resource activity is underway, helped by stronger U.S demand, the lower Canadian dollar and accommodative monetary and financial conditions.” This “reorientation” being the Canadian economy shifting away from it’s dependence on oil & resources.

Although not explicitly referenced in the Bank of Canada’s news release, housing in Canada is certainly taken into account by the Bank of Canada in their decision making process. Predictably, lower rates tend to encourage home buyers to take on higher priced homes as low borrowing rates result in home buyers being able to carry more debt.

Ultimately, the decision to keep the overnight lending rate at 0.50% will mean that prime rates in Canada will continue to remain at 2.70%. Great news for home-owners who qualified and decided to take variable rates.