Growth Rate Predictions & Bank of Canada to Hold Line on Prime

The Bank of Canada announced on October 23rd 2013 that it was keeping its trend-setting overnight lending rate at 1 per cent. It has been at this level since September 2010.

The biggest change from previous statements was that it no longer hinted that the next move will be a rate hike. Instead, the Bank defended its decision not to cut rates amid persistently low inflation.

The Bank said it does not want to risk reversing the current “gradual unwinding of household imbalances” and slowdown in household debt growth. In other words, the housing market is well behaved right now and the Bank wants to keep it that way.

The Bank said global growth had become “less favourable” for Canada. This is a reference to the slow pace of economic recovery and increased uncertainty in the United States, which is resulting in weaker than expected Canadian export growth and business investment.

Accordingly, the Bank has lowered its projections for Canadian economic growth this year and in each of the next two years.

The Bank now expects economic growth of 1.6 per cent in 2013, down from the 1.8 per cent projected back in July. Growth is expected to pick up to 2.3 per cent in 2014, which is down from a 2.7 per cent projection in July, and edge up further to 2.6 per cent in 2015, also down from 2.7 per cent in July.

The Bank now expects that inflation will not return to its 2 per cent target and the economy will not return to full production capacity until “around the end of 2015”. That’s been pushed back from the previous expectation of their doing so by mid-2015.

As such, the possibility of the Bank hiking interest rates anytime this year or next is likely off the table at this point. If anything, the odds that rates could be cut has increased; however, unless the economic outlook deteriorates further, the most likely scenario is that the Bank will keep interest rates on hold for quite some time yet.

As of October 23rd, 2013, the advertised five-year lending rate stood at 5.34 per cent, unchanged from the previous Bank rate announcement on September 4th.

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Jeffrey Carpenter

Jeffrey Carpenter

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CENTURY 21 First Canadian Corp., Brokerage*
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