Bank of Canada Holds Steady on Interest Rates @ 0.5%

Bank of Canada Holds Steady on Interest Rates @ 0.5%

 

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.

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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