The Bank of Canada isn’t budging on its policy rate, at least at the moment, and that’s good news for borrowers.
Canada’s central bank maintained the overnight rate, which influences the variable-rate mortgage market, at 1.75 percent.
In a strong economy the bank will typically hike interest rates, whereas in a weaker one it will lower rates to stimulate spending. Standing on the sidelines matches the Bank of Canada’s recent wait-and-see approach.
“The oil sector is beginning to recover as production increases and prices remain above recent lows,” reads a statement from the Bank of Canada on the decision.
“Meanwhile, housing market indicators point to a more stable national market, albeit with continued weakness in some regions,” the statement continues.
The Bank of Canada’s decision to stand on the sidelines isn’t surprising.
Between July 2017 and October 2018 the central bank hiked the overnight rate five times as the Canadian economy recovered from a weakened energy sector.
But since the fall it has taken a hands-off approach, particularly in the wake of a weaker-than-expected performance from the Canadian economy in the fourth quarter.
While some expect the central bank to continue on the path of inaction, there are growing calls for a rate cut.
“[W]e think that policymakers are underestimating the extent to which the housing downturn will weigh on economic growth this year,” writes Stephen Brown, the senior Canada economist for Capital Economics, an economic-research firm.
“First, although there have been some positive signals from the housing market in recent months, the very low level of new home sales suggests that housing starts will drop sharply in the second half of the year, weighing on residential investment,” he continues.
Capital Economics also expects strong employment growth to peter out.
And then there’s the global backdrop, which is riddled with trade wars and how the Canadian economy performs will depend, at least in part, on international relations.
“Export growth will instead depend mainly on how demand growth develops in the US, where the latest business surveys paint a gloomy picture,” writes Brown.
There has been increased attention on the mortgage market of late as next year a surge in renewals is expected. In 2015, the second-highest number of annual homes sales was reached.
Given five-year fixed-rate mortgages are the most popular type, 2020 is shaping up to be an important year for the housing market.
However, with currents rates not so far off what they were five years ago, experts Livabl spoke to weren’t raising alarms.
“I can’t imagine there are going to be a lot of renewing out of five-year mortgages next year that are going to be in difficult situations,” Will Dunning, an economist, tells Livabl. “There will be some, but I don’t think it should be creating as much worry as it seems to be in some quarters.”