The Bank of Canada announced on September 3rd, 2014 that it was holding its trend-setting overnight lending rate at 1 per cent. The overnight rate has not moved in four years. It’s likely that it will remain where it is for some time yet.
- Inflation is on target -- Inflation recently increased and is tracking close to the Bank’s 2 per cent target. However, the Bank believes the increase reflects temporary factors and cited evidence in support of this in its policy rate announcement. As a result, it does not see interest rate hikes as being necessary to rein it in. Instead, the Bank thinks inflation will keep itself in check as temporary factors dissipate.
- Uncertainty remains high -- While the U.S. economic recovery appears to be back on track after a dismal first quarter, European economic growth has faltered due in part to its trade sanctions with Russia. This means low interest rates are still needed to support Canadian economic growth while questions marks loom about the outlooks for global economic growth, demand for Canadian exports, and Canadian economic growth.
- Canadian exports need help from the currency exchange rate --The Bank rate announcement noted that “Canadian exports surged in the second quarter”. The reasons cited were strengthening U.S. investment and “the past depreciation of the Canadian dollar”. Hiking interest rates too soon would result in a stronger loonie and dampened Canadian exports. The Bank is counting on stronger exports to lift business investment and economic growth.
- Higher exports have not yet translated into stronger investment or hiring:The Bank was pleased to see the pickup in exports but noted, “While an increasing number of export sectors appear to be turning the corner toward recovery, this pickup will need to be sustained before it will translate into higher business investment and hiring.” As such, interest rates will need to remain stimulative in order to entice firms into increased investment and hiring even if exports remain strong.
With these reasons in mind, interest rates are unlikely to rise in the near future.