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Bank of Canada keeps rates on hold

Outlook largely unchanged amid growing uncertainty

The Bank of Canada announced on January 18th, 2017 that it was keeping its trend-setting target overnight lending rate at 0.5 per cent.

The announcement was accompanied by the Bank’s Monetary Policy Report (MPR), which indicated that the Canadian economy and job market remains slack. Both the Bank’s policy interest rate announcement and MPR keyed in on headwinds and uncertainties facing the Canadian economy. Moreover, it expects Canadian housing activity to weaken in the face of “previously announced changes to housing finance rules and by mortgage rates that have risen in response to higher bond yields.”

Government spending was singled out as one of few strengthening sources of economic support. However, Bank’s views on balance suggest that Canadian economic growth will remain lacklustre over the next couple of years.

In its economic forecast, the Bank stressed that its projections “needs to be viewed in the context of elevated policy uncertainty at the global level,” and stated that global uncertainty was undiminished, “particularly with respect to policies in the United States.” Should U.S. trade policy become more restrictive under a Trump administration, the Bank may lower its economic projections.

The announcement and its forecast both strongly suggest that the Bank is in no hurry to raise its trend-setting overnight lending rate. That said, higher bond yields in Canada and recent regulatory increases in capital requirements for lenders means Canadian homebuyers will likely be facing higher mortgage rates in 2017.

As of January 18th, 2017, the advertised five-year lending rate stood at 4.64 per cent, unchanged from both the previous Bank rate announcement on December 7th and one year ago.

The next interest rate announcement will be on March 1st, 2017. The next release of the Monetary Policy Report, which will update the Bank economic forecast, will be on April 12th, 2017.

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