Interest Rates

Bank of Canada kicks off 2020 with no change to interest rates

By: Zandile Chiwanza on January 22, 2020

The Bank of Canada (BoC) today maintained its target for the overnight rate at 1.75%, amid recent trade developments, geopolitical tensions, slowing labour markets, and unexpectedly soft consumer spending.

“The global economy is showing signs of stabilization, and some recent trade developments have been positive,” the bank said in its first interest rate announcement of 2020

This marks the 10th time since December 2018 that the bank has decided to hold interest rates. The last time the bank moved on interest rates was in October 2018 when it increased rates to 1.75%. 

Economists widely anticipated this news.  

Benjamin Reitzes, director of Canadian rates and macro strategist at the Bank of Montreal wrote in a note published prior to today's rate announcement, that while “overall prices were steady to end the year, leaving inflation for all of 2019 at 1.949%...more or less right on target … policy rates aren't likely to move any time soon.”

Sherry Cooper, the chief economist at Dominion Lending Centres, told CTV News that “the December employment report confirms the Bank of Canada's current policy stance that despite headwinds, the economy remains relatively resilient and that further interest rate cuts are unnecessary.”

Trade tensions ease, geopolitical tensions rise

Global trade policy has remained a key concern for the bank for almost two years. But since October 2019, the US-China trade conflict has eased, improving the global trade climate. As a result business sentiment has also strengthened.

But in a turn of events, the recent Iran plane crash poses a challenge for Canada-US relations — of the 176 victims, 57 were Canadian.

“There remains a high degree of uncertainty and geopolitical tensions have re-emerged, with tragic consequences,” the bank said.

Housing market at risk of "froth"

Housing activity has regained strength more quickly than expected as economic conditions and population growth drive demand.

But reported that there are risks in certain markets of froth – “conditions that can precede a housing market bubble.”

“The fact is, the fundamental demand for housing appears to be outpacing our ability to build new homes, which can put renewed upward pressure on prices,” Poloz told an audience at the Greater Vancouver Board of Trade recent forum.

“It can be very unhealthy when the situation becomes speculative because it can lead to a sudden downdraft in house prices later, with wider implications for the economy.”

“I do think the Bank of Canada's concerns about froth in the market — in particular in the Greater Toronto Area — are warranted,” John Pasalis, president of Realosophy Realty, told BNN Bloomberg in an email.

“As we saw several years ago, markets can turn from balanced to frothy on a dime and given the tight conditions in the GTA market, it's important to assess if we see similar speculative behaviour driven by market psychology rather than market fundamentals.”

The bank didn’t say much about the housing market except that “residential investment was robust through most of 2019, moderating to a still-solid pace in the fourth quarter.”

The bank also projects a pickup in household spending, supported by population and income growth, as well as by the recent federal income tax cut.

Consumer spending “unexpectedly soft”

Canada’s central bank did appear concerned about increased consumer caution in today’s announcement.

That’s not surprising, given record-high household debt levels and reports showing Canadians have been saving a larger share of their incomes.

"This could dampen consumer spending but help to alleviate financial vulnerabilities at the same time," the banks said.

Slowing labour market

The Canadian job market bounced back in December to post a gain of 35,200 jobs and reversed some of the losses in November, which “saw the biggest monthly loss since the financial crisis,” CTV News reported.

However, the bank signalled job creation has slowed and "labour markets in most regions have little slack and wages continue to firm.

Dawn Desjardins, Royal Bank of Canada's vice-president and deputy chief economist, found some positives in the health of the labour market, but told CTV News "it is not without challenges."

Technology is bound to disrupt the market and re-skilling will be key to keeping Canadians employed, she added. RBC has predicted 25% of jobs will be heavily disrupted and expects people to change jobs more frequently than they once did.

According to Desjardins, Canadians have the skills to step into new roles, but the country has to continue to put time and money into training young workers and continuing to evolve jobs.

Business investment to contribute modestly to growth

Measures of inflation remain around 2%. This is consistent with an economy that, until recently, has been operating close to capacity.
The bank attributed the slowdown in growth in late 2019 to special factors that include strikes, poor weather, and inventory adjustments. 

In addition, "global economic conditions have been affecting Canada’s economy to a greater extent than previously predicted.”

The bank now forecasts the global economy will grow by just over 3% in 2020 and 3.25% in 2021. For Canada, real GDP will grow by 1.65% this year and 2% in 2021.

Rates to stay on hold through 2020?

Across the border, The Federal Reserve signalled it would keep interest rates on hold through 2020 amid a solid economy, sticking to the sidelines during an election year, the Financial Post reported. The Fed cut rates three times in 2019.

Avery Shenfeld, managing director and chief economist of CIBC Capital Markets, said in an email shortly after the announcement that “there was no pressing reason for Governor Poloz to get up from his easy chair today, but the Bank is now a bit more worried that it will have to act.”

Judging by the bank’s guarded tone throughout the press release, a cut doesn't look likely anytime soon.

The BoC concluded it will be “watching closely to see if the recent slowdown in growth is more persistent than forecast. In assessing incoming data, the Bank will be paying particular attention to developments in consumer spending, the housing market, and business investment."

The next announcement on the overnight rate target will be released March 4, 2020.