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Bank of Canada Keeps Interest Rates Unchanged, Cuts Economic Outlook

Posted: October 21, 2016

OCTOBER 20, 2016

On Wednesday, the Bank of Canada (BoC) announced it would leave its benchmark interest rate at 0.5%. At the same time, the central bank cut its economic growth forecast for the year due to an projected slowdown in housing resale activity and a weaker-than-expected outlook for exports.

For homeowners with a variable-rate mortgage, this means your rate stays the same. Some economists expect the BoC to keep rates where there are until sometime in 2018 so it’s possible that your mortgage rate will stay put for at least another year. But for those looking for a home, the best mortgage rates have ticked up a bit lately as the new mortgage rules that came into effect this weekhave put upward pressure on rates.

Economic Impact of New Mortgage Rules

The new mortgage rules are expected to have a slightly negative effect on the economy. “We expect it to reduce housing resales in the near term, and perhaps cause a shift toward the construction of smaller homes, which together will shave some spending in the economy,” says BoC governor Stephen Poloz.

In its monetary policy report, which was released today, the central bank predicts that the changes will reduce Canada’s gross domestic product by 0.3 percentage points by the end of 2018. The central bank reduced its overall economic growth forecast to 1.1% (down from 1.3%) for this year and 2% (down from 2.2%) in 2017. The 2.1% growth forecast for 2018 was left unchanged.

In fact, in comments to reporters following the announcement, Poloz revealed the reduced forecast very nearly prompted a rate cut, but held off as it’s still unclear how the new rules will impact the market.

“Given the downgrade to our outlook, (the) governing council actively discussed the possibility of adding more monetary stimulus at this time, in order to speed up the return of the economy to full capacity,” he stated. “However, we identified a number of significant uncertainties in the current context that are serving to widen the zone of balance within our risk-management framework.”

Fighting Back Against Growing Debt

Housing has helped to keep the economy chugging along as commodity prices have plummeted. But many government agencies and economists have warned that housing has become a risk to the economy as low interest rates have prompted a number of Canadian households to take on more debt.

The country’s debt-to-income ratio reached 167.6% in the second quarter of 2016, according to Statistics Canada. That means households held $1.68 in debt for every dollar of disposable income. And a January report from the Office of the Parliamentary Budget Officer stated that “Canada has experienced the largest increase in household debt relative to income since 2000” among G7 countries and that “households in Canada have become more indebted than any other G7 country over recent history.”

However, Poloz does note that the new mortgage rules are a “welcome development, as it will mitigate financial vulnerabilities over time.”

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Bank of Canada Keeps Interest Rates Unchanged, Cuts Economic Outlook