The Bank of Canada opted to maintain its target for the overnight interest rate this morning at 1.25 per cent.  In the statement accompanying the decision, the Bank noted that although growth in the Canadian economy slowed more than expected in the fourth quarter of 2017, the economy is expected to operate at capacity going forward. The bank cited recent trade policy developments, mainly the threat of a trade war with the United States, as a significant risk to its outlook for growth and inflation.

The Canadian economy is at or very close to full-employment, meaning there is little room for Canadian firms to expand output without putting undue pressure on inflation. There are signs core inflation is already firming up. Two of the Bank’s three core inflation measures are closing in on the Bank’s 2 per cent target and all three measures have increased significantly in the past six months. Absent any unforeseen challenges to the Canadian economy, monetary policy will be biased in the direction of higher interest rates.  However, the Bank will likely hold off raising its overnight rate while it assesses the impact of tighter monetary policy over the past year, the impact of newly implemented B-20 guidelines on mortgage qualification rules, and heightened risk to Canadian exports from US trade policy.

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The Bank of Canada opted to raise the target for its overnight interest rate this morning 25 basis points  to 1.25 per cent.  In the statement accompanying the decision, the Bank cited recent strong economic data and rising inflation as motivations for the rate increase. The Bank expects growth in the Canadian economy to slow to 2.2 per cent in 2018 and 1.6 per cent in 2019 with consumption and new home construction contributing less to growth than in years past.  With the economy returning to full-capacity, inflation is forecast to remain at 2 per cent over the medium term.  The Bank also flagged risk to its outlook from ongoing NAFTA negotiations and noted it would remain cautious in considering future interest rate adjustments.

With the Canadian unemployment rate hitting a 40-year low and inflation ticking higher in recent months, the Canadian economy would seem to be operating at full capacity. That argues for a more hawkish approach to monetary policy in order to bring interest rates closer to what the Bank estimates would be neutral for the economy, that is, a level in which the economy is neither running too hot nor too cold.  While today's rate increase was widely anticipated, it did come earlier in the year than previously expected and likely signals further rate increases to come in 2018.  Canadian mortgage rates have already moved higher in anticipation of Bank of Canada tightening, which means a much tighter borrowing environment in 2018, particularly given newly implemented mortgage qualifying rules for low-ratio buyers.

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The Bank of Canada maintained its target for the overnight rate at 1 per cent this morning. In the statement accompanying the decision, the Bank noted that the Canadian economy is evolving as expected, with growth slowing in the second half of the year.   On inflation, the Bank expects the continued absorption of economic slack to push core inflation higher in subsequent months.  Importantly, the Bank concluded its statement by noting that rate increases will be required over time, though it will proceed with caution as it assesses the economy’s sensitivity to higher rates.

Although the Bank of Canada has a bias toward raising rates over the next 12 months, it is currently sidelined by low inflation as well as concerns over how higher interest rates will interact with elevated household debt levels.  We anticipate the Bank will remain on hold in early 2018 as it assesses the impact of the forthcoming mortgage stress test, but will look to raise rates one or two times in the second half of next year.

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The Office of the Superintendent of Financial Institutions (OSFI) announced new restrictions on uninsured mortgages today. Effective January 1, 2018, all home-buyers with a down-payment of more than 20 per cent will have to qualify at the higher of the posted 5-year qualifying rate and their contractual rate plus 200 basis points (2 per cent).  This is in addition to policy announced in October of 2016 that required all insured borrowers qualify at the posted 5-year qualifying rate. 

In addition to the new stress test for uninsured mortgages, OSFI is also requiring lenders to establish and adhere to appropriate loan-to-value limits reflective of risk and the current economic environment and is prohibiting s lending arrangements designed to circumvent loan-to-value limits such as combing mortgages with other lending products. 

These new residential mortgage underwriting requirements will apply to all Federally regulated financial institutions.
 
The impact of the new stress test requirement will be to lower the purchasing power of households by up to 20 cent. Like past tightening of mortgage regulations, we anticipate that the market impact will be sharp but temporary. In the past, we have seen home sales decline in the 3 to 9 months following the implementation of tighter mortgage lending standards, with the severity of the impact fading within one year.  However, these new regulations impact a larger pool of mortgages and so the impact could be more significant than in the past.

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The Bank of Canada announced this morning that it is raising its target for the overnight rate by 25 basis points to 1 per cent. In the press release accompanying the decision, the Bank noted that recent economic data have been stronger than expected but growth is forecast to moderate in the second half of the year.  On inflation, the Bank cited some excess capacity and temporary price shocks as factors keeping inflation below its 2 per cent target. Importantly, the Bank mentioned it will be paying particular attention to the evolution of the economy's potential growth rate (meaning the economy's estimated long-run growth rate) as well as to labour market conditions and the economy's sensitivity to higher interest rates. 

The Bank has now removed the stimulus it injected into the Canadian economy in 2015 to offset the impact of falling oil prices. With the economy expanding at a 3.5 per cent rate over the past year, that stimulus is clearly no longer required. The Bank seems to be more concerned about the potential for higher future inflation due to an over-heated economy than on the actual very low inflation observed in recent months. That leaves the door open for further rate increases should economic growth remain robust.  

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The Bank of Canada announced this morning that it is raising its target for the overnight rate by 25 basis points to 0.75 per cent. In the press release accompanying the decision, the Bank noted that Canada's economy has been robust and a significant amount of economic slack has been absorbed. While inflation data has been soft, the Bank expects that this is temporary and that inflation will return to its 2 per cent target by mid-2018. 

The motivation for today's rate increase seems primarily to be that the Bank feels that the stimulus it injected into the Canadian economy in 2015 through two rate cuts is no longer required given a recent trend of strong economic and employment growth. If that is the case, a further 25 basis point increase before the end of the year will likely follow.  After that, the pace of rate increases relies heavily on the trend in Canadian inflation, which to date has been well below the Bank's 2 per cent target. If that trend does not reverse by early next year, the Bank may decide to stop at a 1 per cent overnight rate until higher inflation emerges. 

As bond markets reprice rate expectations, Canadian mortgage rates have returned to levels observed at the beginning of the year. We expect that mortgage rates will rise further in the second half of 2017, finishing near 3 per cent for a five-year fixed rate. 

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The Bank of Canada announced this morning that it is holding the target for its overnight rate at 0.5 per cent. In the press release accompanying the decision, the Bank noted that inflation is broadly in line with the Bank's projection, though intense retail competition is pushing inflation temporarily lower.  The Bank also noted that the tightening of mortgage regulations implemented in the Fall of 2016 have yet to have a substantial cooling effect on markets but it does expect those measures will contribute to a more sustainable debt profile for Canadian households. 

Although the Canadian economy has expanded well above the Bank's estimate of potential growth for three consecutive quarters, including a first quarter that is tracking at close to 4.5 per cent growth in real GDP, the Bank is not optimistic that the economy will sustain that level of growth for much longer.  Moreover,  despite faster growth, a significant amount of slack remains in the economy and there is therefore very little pressure on inflation. Without a signal that inflation is going to push higher, the Bank will remain sidelined at least until early 2018 when it expects remaining slack in the economy will be eliminated.

“Copyright British Columbia Real Estate Association. Reprinted with permission.”

The Bank of Canada announced this morning that it is holding the target for its overnight rate at 0.5 per cent. In the press release accompanying the decision, the Bank noted that economic growth has been faster than previously expected, boosted by what the Bank sees as temporary spending from the oil and gas recovery and a boost to consumer spending by the Canada Child Benefit. However, export growth remains challenged and business investment is low. Therefore, the Bank judges that it is too early to conclude that the economy has turned a corner.  In addition, CPI inflation is trending below its 2 per cent target while the Bank's three new measures of core inflation continue to drift lower. 

That downward trending inflation, along with uncertainty in United States policy,  seems to be the main barriers keeping the Bank from raising its benchmark overnight rate. While there is some remaining slack in the economy, as measured by the output gap, the Canadian economy has been growing well above the Bank's estimate of potential growth (1.5 per cent) for three consecutive quarters including a first quarter 2017  in which available data points to above 4 per cent growth.  In addition to strong GDP numbers, the economy is adding jobs at a rate of 35,000 per month over the past six months, the highest level of job growth since 2010. Should this momentum continue, it is likely we will begin to see a more hawkish Bank of Canada in the second half of the year and a first rate increase in early 2018. 

“Copyright British Columbia Real Estate Association. Reprinted with permission.” BCREA makes no guarantees as to the accuracy or completeness of this information.