OTTAWA—The Bank of Canada remained cautious on the recent strong performance in the Canadian economy and held its target for the overnight rate at 0.5 percent on May 24, as widely expected.
The Bank’s neutral interest rate decision didn’t hint at an impending rise in rates due to hot housing markets, which some observers had been calling for, although the insertion of “at present” after “the current degree of monetary stimulus is appropriate” gave the Canadian dollar a boost. The economy is expected to reach full potential (closing of the output gap) in the first half of 2018 and most economists foresee no rate hikes until then.
Many segments of the Canadian economy such as job growth and consumer spending are showing encouraging signs; however, inflation, wage growth, and exports remain weak.
And global uncertainty is still king. NAFTA re-negotiations now loom.
“The uncertainties outlined in the April MPR [Monetary Policy Report] continue to cloud the global and Canadian outlooks,” said the Bank of Canada on May 24.
The Bank said on April 12 in its Monetary Policy Report that a rise in global protectionism remains the “most important source of uncertainty facing the Canadian economy.”
Hot Housing
The Bank made it clear in April that taming fiery housing markets is up to politicians, even though economists blame low interest rates as being the biggest culprit for the rising prices.
The BoC said that measures enacted by governments including foreign buyers taxes and the need to qualify for mortgages at higher rates “have yet to have a substantial cooling effect on housing markets.”
“We expect the rule changes to be sufficient to slow housing market activity, but as long as expectations for rates to remain low persist, the risks is that hot markets will stay on a slow burn and there is little reason to expect consumer spending growth to weaken significantly,” said RBC deputy chief economist Dawn Desjardins in a note.
