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Bank of Canada keeps interest rates on hold and loses swagger in March

In line with financial market expectations, the Bank of Canada announced on Wednesday, March 6, that it was keeping its trend-setting overnight lending rate at 1.75%.

The Bank’s announcement indicated it is in no hurry to raise interest rates against the backdrop of a further slowdown in Canadian economic growth. Indeed, the Bank said it “expects CPI inflation to be slightly below the 2% target through most of 2019.” It also signaled its “increased uncertainty” about the timing of future rate hikes.

The bottom line is that the Bank will be keeping interest rates on hold until it sees improved household spending, oil prices and U.S. trade policies.

On the morning when the Bank made its interest rate announcement, financial markets put the odds of seeing higher interest rates by 2020 at just under 20%. After the announcement, those odds were pared to less than 15%. Indeed, financial markets put the odds of interest rates remaining on hold for the rest of 2019 at just under 80%. The odds of a cut in the interest rate by the end of 2019 also rose from less than 2.5% before the announcement, to almost 9% immediately after the announcement.

On March 6, the benchmark five-year lending rate was still 5.34%—where it has been since May. This is 0.2% higher than one year ago and 0.7% above what it was during most of mid-2015 through mid-2017. All mortgage applicants must qualify for financing based on an interest rate no less than the benchmark five-year lending rate, even if the mortgage is for less than five years.

Canada’s major chartered banks are currently advertising five-year fixed mortgage interest rates ranging from 3.64% to 5.34%. Home buyers can often negotiate a rate below lenders’ advertised rates depending on their creditworthiness and the degree to which they do other banking business with the mortgage lender.

The Bank of Canada’s next interest rate announcement will be on April 24 and will be accompanied by its updated outlook for the economy and inflation.

(CREA 03/06/2019)

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