Yesterday the Bank of Canada announced that it would hold the overnight rate to 1.75%.  For variable mortgage clients, bank prime rates for most lenders remain at 3.95%.  Effective rates range from 2.95% and up for 5 year variables.  In comparison, typical 5 year fixed rates are starting at 3.69% these days, with some specials available. 

According to BOC, new neutral range would be somewhere between 2.5% – 3.5%, an increase of 0.75% – 1.75% to the overnight rate.  Any increases would be largely dependant on:

• Oil
• Housing market
• Global trade

Oil prices are 25% lower than what they expected they would be in October.  Projected real GDP is expected to grow by 1.7% in 2019 (0.4% lower than forecasted in October).  Also, the effects of tighter mortgage guidelines coupled with 5 rate hikes since mid 2017 are having a greater effect than the Bank originally expected.  

Stephen Poloz was careful to explain that any increases, although data-dependant, would be very, very gradual (in fact, they took out the word “gradual” from their reports, as many began to think that this word meant an increase at every announcement date!).

The Canadian labour market is strong, unemployment is at a 40 year low, the weaker dollar will likely improve trade, and the economy has been running at full capacity for the past 18 months.  One interesting point made in Poloz’ speech was that the 4^th quarter is usually the worst for oil, as that is when it typically stockpiles the most.  This is expected to alleviate in the first 2 quarters of 2019.

My speculation regarding global trade:  As trade deals are hammered out, uncertainty as to how companies invest in themselves begins to dissipate, and this may affect projections on growth as the year progresses (in a positive way).

Core inflation is at around 2%.  CPI eased to 1.7% in November due to lower gas prices and is expected to be around 2% by late 2019 in Canada.  Global growth for 2019 is forecasted at 3.4% (down from 3.7% in 2018).

The next time BOC reports on rate increases will be March 6.  Please don’t hesitate to contact me if you have any questions.

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