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Interest rates HOLD!.

May 27, 2016

Great news! Mortgage rates are staying steady at 0.5% yet again.

The devastating wildfires in northern Alberta and Saskatchewan will put Canada's GDP into negative territory this quarter as oil production is cut back, but there is no need to change monetary policy, the Bank of Canada says.

"Fire-related destruction and the associated halt to oil production will cut about 1¼ percentage points off real GDP growth in the second quarter," the bank said in a statement announcing its latest monetary policy decision Wednesday.

The bank was forecasting the April-to-June period to be weak to begin with, with growth of about one per cent according to its April forecast. But the fires could push that number into negative territory, the bank said Wednesday.

That economic ground is likely to be made up down the line, as the area rebuilds, however.

"The economy is expected to rebound in the third quarter, as oil production resumes and reconstruction begins," the bank said.

Alta Wildfire NASA 20160517

The wildfire that hit Fort McMurray is now forecast to turn Canada's GDP growth negative for the second quarter. (NASA/Canadian Press)

The bank elected to keep its benchmark interest rate, known as the target for the overnight rate, steady at 0.5 per cent on Wednesday. That's the same level it's been at for almost a year, after the central bank cut the rate twice in 2016 in a bid to stimulate the economy.

While the decision was expected, the Canadian dollar gained almost half a cent to 76.61 cents US. All things being equal, a rate hike would normally send the loonie higher; a rate cut would send it lower.

The loonie's recent slide has given the bank a little leeway to sit on the sidelines, leaving rates unchanged.

The rate is what the central bank charges banks for short-term loans, but it has an impact on the rates that consumers get for their mortgages and savings accounts.

The bank meets every six weeks to set its monetary policy. Of the 27 economists tracked by Bloomberg who cover the central bank, none were expecting a change on Wednesday, so the news didn't come as a surprise.

BANK OF CANADA KEY OVERNIGHT RATE

With the economy's soft performance in the first half of the year, many economists have been pushing for another cut to stimulate the economy. That could easily encourage more reckless borrowing in housing, which brings its own set of problems.

The loonie has lost about three per cent of its value since the last bank meeting, which may give the economy a boost over the longer term by making Canadian goods cheaper abroad. If that happens, it removes the bank's obligations to try a rate cut the central bank clearly isn't comfortable with.

stephen poloz

Stephen Poloz and the rest of the board of the Bank of Canada elected to make no change to Canada's monetary policy on Wednesday. (Victor J. Blue/Bloomberg)

In the U.S., there has been speculation the Federal Reserve may tighten economic policy — raising interest rates — at one of its next two meetings. That would move the U.S. dollar higher, and send the loonie lower as an opposite reaction.

"The loonie's recent softening and the Fed's more hawkish tone of late should bring some comfort to the bank," Bank of Montreal economist Benjamin Reitzes said.

"Indeed, if the Fed follows through with a rate hike this summer, that should keep the Canadian dollar on the defensive, taking pressure off Governor Poloz to sound more dovish."

The bank's next meeting is scheduled for July 13, which is exactly one year after the last time the bank moved its rate, down from 0.75 per cent to its current level of 0.5 per cent.

Housing market a concern

Overall, the bank referred to a "complex adjustment" underway in the economy in its statement Wednesday, striking a cautious tone.

"The global economy is evolving largely as the bank projected in its April Monetary Policy Report," the bank said. "Growth in the first quarter of 2016 appears to be in line with the bank's April projection."

On the subject of real estate, the bank says Canada's housing market is showing signs of "strong regional divergences," which have made it so that "household vulnerabilities have moved higher."

The average Canadian house price hit $508,097 last month, which was the busiest month for home sales on record, the Canadian Real Estate Association says.

"Clearly there's concern about the hot housing markets in Toronto and Vancouver," Reitzes said, "but again, that won't drive any policy response from the Bank."

 


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