It was early in 2013 when I wrote my first blog post about how interest rates were going nowhere fast. Plus ça change, plus c’est pareil.
In fact, the Bank of Canada lowered its trend-setting overnight lending rate twice this year in a bid to prop up Canadian economic growth in the wake of a significant drop in oil prices. When it published its freshest economic forecast in October 2015 and subsequently announced in December that it was keeping interest rates on hold, the Bank provided important clues as to why it won’t be raising interest rates any time soon:
- The Bank stressed that it will take time for the Canadian economy to adjust to lower oil prices. Raising interest rates would cause economic growth to slow at a time when it’s struggling to gain traction. That would hurt the economic adjustment underway.
- Inflation is hanging out near the bottom of the range for the Bank’s target rate of two per cent (plus or minus one per cent). Additionally, the Bank’s Business Outlook Survey published October 2015 shows that the vast majority of businesses expect inflation to keep within the inflation target range over the next two years. Moreover, it shows most businesses expect it to stay within the lower half of the Bank’s target range. With inflation low and inflation expectations well anchored, the Bank does not need to raise interest rates to squelch inflation.
- The Bank is counting on Canadian exports to strengthen. If it were to raise interest rates now, the Canadian dollar would rise. That risks causing exports to weaken rather than strengthen. Not exactly the kind of thing the Bank wants to see.
Another consideration relates the Bank’s inflation-control target, which is up for renewal in 2016. Raising the target range would signal that the Bank of Canada is comfortable with higher inflation, which translates into keeping interest rates on hold longer than currently anticipated. Lowering the inflation target range signals that the Bank is prepared to raise interest rates sooner than currently expected, which would strengthen the Canadian dollar and risk causing exports to weaken (see point #3 above as to why that is not something the Bank is unlikely to be inclined to do). Keeping the target range right where it is? That’s the status quo, with interest rates remaining on hold for some time for reasons outlined in the three points above.
At the time of writing, economists at Canada’s federally-regulated banks expect that the Bank of Canada will keep interest rates on hold until 2017. Of course, those views can change between now and then. That said, in recent years, the timetable for when interest rates will start to rise has been repeatedly pushed further out into the future. Until then, interest rates staying low for longer is good news for homebuyers.
