Canadian dollar gains ground while Bank of Canada maintains rates
Momentum Public Relations – Stephanie Boucher
On January 20th, the Bank of Canada announced that it will maintain its current interest rate at 0.5 percent as it waits to see what the government has in store for the struggling economy.
This decision has been highly anticipated by economists throughout the country, who have had split opinions on whether or not the interest rate would be lowered. It has been an important topic this week as this interest rate has a strong impact on the rate Canadians get from banks and lending institutions when they choose to save or borrow money.
The Bank of Canada Governor Stephen Poloz cut the bank’s benchmark interest rate twice within the last year in an attempt to stimulate the economy. However, lower interest rates make the Canadian dollar less attractive on the world markets, as foreign investors seek a better return elsewhere. A lower dollar means higher import prices, which affects many Canadian small businesses, and also sparks inflation. The decision to keep the rate as is at 0.5 per cent was a safe play, despite other global factors.
According to Poloz, the Bank’s decision to maintain the interest rate was made because the economy, while still struggling, is expected to show signs of improvement later this year. In fact, the Bank of Canada projects that the Canadian economy will grow by 1.5 per cent in 2016 and by as much as 2.5 per cent in 2017. The Bank also expects inflation to rise by about 2 per cent by early 2017.
The price of oil, as well as other commodities, has had a negative effect on the Canadian economy – the Bank expects the economy’s return to above-potential growth to be delayed until the second half of 2016 and moving in to 2017. According to a statement by the Bank of Canada, “The complex nature of the ongoing structural adjustment makes the outlook for demand and potential output highly uncertain. The Bank’s current base case projection shows the output gap closing later than was anticipated in October, around the end of 2017.”
After the announcement, the Canadian dollar rose to 68.89 cents US, and after many ups and downs throughout the day, closed at 69.03 cents US, up 0.44 of a cent.
National employment has been rather unaffected, despite recent reported job losses in the resources sector.
According to economists, the Bank’s decision to maintain the overnight rate will have a minimal impact on mortgage rates for the time being. While mortgage rates have increased slightly over the last few months, to the confusion of many homeowners, they remain steady for now. Experts advise new homeowners and those looking to renew their mortgage to choose a fixed, or locked in rate, one with fixed payments as they forecast mortgage hikes within the next few years.
Now, the ball falls in the court of Finance Minister Bill Morneau, who must deliver a stimulus budget that will boost economic growth in Canada through government spending on infrastructure, public transport, social housing and green energy. This spending will result in much larger deficits than the $10-billion limit promised by the Liberal Party of Canada during their election campaign. The Liberal Party has not disclosed how far beyond the target it will go.
Despite the decision to keep the rates steady this week, the Bank of Canada maintains that the country’s economic environment remains very uncertain. The Bank’s Governing Council maintains that its current stance of monetary policy is appropriate, but cuts to the benchmark overnight interest rate could still happen within the next few months, as early as March.
Sources:
http://www.bankofcanada.ca/2016/01/fad-press-release-2016-01-20/
http://www.cbc.ca/news/business/interest-rate-poloz-1.3411621
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