Interest Rates

BoC keeps policy rate at 0.5%, but hints higher interest rates are coming soon

By: John Shmuel on May 24, 2017

The Bank of Canada left its benchmark interest rate unchanged Wednesday, while hinting that it may soon be time to start normalizing rates.

The key rate remains unchanged at 0.5%, where it has sat since July 2015, when Governor Stephen Poloz slashed it from 0.75% in response to an oil price crash.

In a sign that keeping rates at current levels may soon be behind the bank, Poloz and his team noted Wednesday that Canada’s economy has rebounded from weak crude prices.

“The Canadian economy’s adjustment to lower oil prices is largely complete and recent economic data have been encouraging, including indicators of business investment,” said the BoC in a statement. “Consumer spending and the housing sector continue to be robust on the back of an improving labour market, and these are becoming more broadly based across regions.”

Canada’s economy has been surprisingly strong this year, owing to a few factors. First, oil prices, as mentioned, have made a recovery, and many firms in the energy patch have slowed layoffs in the past year.

Secondly, strong housing markets in Toronto and Vancouver have lifted the economies of Ontario and British Columbia, Canada’s first and fourth-largest provincial economies, respectively.

The Canadian economy’s adjustment to lower oil prices is largely complete and recent economic data have been encouraging

The Bank of Canada is forecasting that GDP growth in the first quarter of 2017 hit 3.8%, which would easily outpace the U.S. economy and puts Canada at the front of the pack of the G7 industrialized countries.

But it’s clear from Wednesday’s report that concerns remain from the Bank of Canada.

“Export growth remains subdued, as anticipated in the April MPR, in the face of ongoing competitiveness challenges,” the BoC said in a statement. “The Bank’s monitoring of the economic data suggests that very strong growth in the first quarter will be followed by some moderation in the second quarter.”

The bank also noted that despite a slew of new housing rules announced at the provincial and federal levels in the past year, the housing markets of both Vancouver and Toronto continue to remain uncomfortably hot.

“Macroprudential and other policy measures, while contributing to more sustainable debt profiles, have yet to have a substantial cooling effect on housing markets,” the BoC said.

There has been a growing chorus of late for the BoC to move interest rates higher, especially as the Canadian economy has been outpacing the U.S. economy recently — where the central bank has already begun normalizing rates.

The bank’s next interest rate announcement will happen on July 12.