The Bank of Canada’s overnight lending rate has been at one percent since September of 2010. This past week Governor Mark Carney elected to keep the rate at that one percent yet again. But it appears that the governor and the Monetary Policy Report put out by the bank, put out at the same time that the rate decision was announced, had some mixed messages. Of course these were in “economeese” and needed translated by economists so that consumers could fully understand the content.
One item of note is that the rate increase won’t be happening for a while now. The Bank published its last report in October of 2012, which led some economists to predict rate hikes in the second half of 2013. That will most likely not happen. Last week the Bank described the need for a rate hike as less imminent. That is the translated version.
The reasons behind the rethinking include the fact that the economy in Canada saw a 1.9 percent growth in 2012. The October report predicted a 2.3 percent growth in 2013, along with a 2.4 percent growth in 2014. The new predictions are not as robust, 2 percent for this year and 2.7 percent in 2014. The economy is just going to remain sluggish for a bit longer, with improvement now expected by 2014’s second half, rather than by 2013’s end.
The fourth quarter in 2012 also saw a slower GDP growth. The prediction was for 2.5 percent but the final numbers, not yet available, are expected to put the GDP in the range of 1 percent. The slowdown was greater than the Bank expected because of weaker numbers in exports and business investments. Though both of these items are expected to improve throughout this coming year, those markets are expected to be more restrained than anticipated in October’s report. The more restrained economy decreases inflation, meaning a rate increase at this time would not be beneficial.
The Bank also looks at household debt when deciding on raising rates. Over the past year or so economists have been warning Canadians to get a hold on their debts and the Bank is convinced people are listening. Debt-income ratios, which are still high, are expected to stabilize as the rate of household debt growth has seen considerable decrease. This also helped to put off the rate increase until sometime in 2014.
Household spending has decreased, and while that is good for the debt situation, it did cause the economic numbers in the second half of 2013 to decrease. An increase in the lending rate would most likely decrease consumer spending even more, thus hampering rather than helping the economy. The entire process is one big balancing act.
Concerns for Canada’s inflation risk, which at present is in a muted state, also played a part in the Bank’s decision. If the United States economy continues to improve, that means more exports going to that country. Also, the possibility of an increase in residential investments might similarly make the inflation rate increase. On the real estate front, the Bank will be looking at how the market performs through the spring season to see if housing prices start increasing again. The mortgage rule changes, the last of which was made in July of 2012, should keep things in check. If inflation increases, the lending rate might be increased sooner than 2014.
The inflation outlook also considered factors that are downside risks. Of prime concern is the debt situation in Europe. A weaker European Union means fewer exports to those countries and fewer Europeans investing in Canada. If that happens there may be a decrease in household spending here at home. In this tightrope walk, household spending must be high enough to bring the inflation rate down, but low enough not to incur more household debt.
Those in the real estate and mortgage trades are pleased with the continued low rates. They make it easier for businesses and individuals to borrow cash, meaning more sales. The lower rate also gives those with variable rate mortgages a break, since they don’t have to worry about an interest increase until probably 2014.