OTTAWA—The Bank of Canada kept its key policy rate unchanged at 1.5 percent on Sept. 5, as NAFTA uncertainty remains the primary risk to an economy that is moving in the right direction.
Of note, exports rose by an annualized 12.3 percent, which helped second-quarter economic growth hit 2.9 percent—slightly better than the bank’s 2.8 percent expectation.
No changes in rates were expected for the BoC’s September announcement; however, a 0.25 percent hike is expected for the bank’s next rate decision on Oct. 24.
“The only impediment that’s preventing them from increasing rates is this big downside risk coming from NAFTA trade uncertainty,” said University of Waterloo economics professor Jean-Paul Lam in an interview.
“If that goes away, I think they will raise rates one more time this year.”
Housing Market Dynamics
The BoC appears satisfied with how the economy and consumers are adjusting to higher interest rates and the much-discussed levels of indebtedness coming down. “Credit growth has moderated and the household debt-to-income ratio is beginning to edge down,” according to the BoC.
As mortgages rates have risen in the last year, Janine White, VP of Marketplace & Strategy Development for RateSupermarket.ca said she’s seen an encouraging change in the behaviour of consumers.
“We’re seeing [website] visitors take much more time reading content around mortgages and doing their own research around mortgages which in our view is really really positive,” said White in an interview.
The rotation away from consumer borrowing and spending on housing driving the economy with business investment and exports picking up the slack is the bank’s desired progression for the Canadian economy.
The bank reported that business investment and exports have been “growing solidly for several quarters” despite trade uncertainty, and the housing market is showing signs of stability after the introduction of mortgage stress tests at the start of the year.
It’s been a mostly subdued year for the housing market, but the Canadian Real Estate Association (CREA) reported that July’s 2.1 percent increase in the MLS home price index was the first acceleration in year-over-year home prices since April 2017.
“Consumers are learning about their own personal finances and taking a more proactive approach in understanding what they can afford,” said White, who has noted greater usage of online mortgage calculators.
However, White also noted that more business is going to alternative lenders as people are less able to get a mortgage from the big banks due to the stress tests. Those borrowers end up paying higher rates.
