Bank Of Canada Keeps Interest Rate At 1%

As many expected, the Bank of Canada kept the benchmark interest rate at 1%, and hinted that future interest rate hikes will happen on a more subdued schedule.

The decision to keep interest rates steady comes as the “growth” of the Canadian economy is expected to slow.

While most Canadians aren’t seeing any benefit from the so-called boost to the economy in recent quarters, that jump in reported GDP is expected to be temporary, with growth projections for 2018 and 2019 falling to 2.1% and 1.5% respectively.

“Real GDP growth is expected to moderate to a still-solid pace close to two per cent … over the second half of the year,” said the Bank of Canada.

As noted by the Bank, “The bank forecasts declining contributions from residential investment and consumption, which largely fuelled Canada’s recent growth spurt. These changes will largely be consequences of higher borrowing rates, higher household indebtedness and policy measures aimed at cooling hot real estate markets, the report said.”

In part due to the expected decline in GDP growth, the Banks says “While less monetary policy stimulus will likely be required over time, governing council will be cautious in making future adjustments to the policy rate.” 

Economic disconnect

One of the growing trends over recent years has been the gap between how those in power see the economy, and how it is experienced by Canadians. As the economy changes, the tools used to analyze it have remained the same. The unemployment rate fails to account for those who give up looking for work, and ignores the quality and security of the jobs being created vs those being lost.

The Bank of Canada is also caught in a trap, as they are attempting to increase interest rates in part to discourage further debt accumulation, but that debt is being accumulated because Canadian households are trying to hold onto our standard of living in the face of stagnant wages, job insecurity, increased regulations, and higher taxes. So, unless those damaging policies are changed, increased interest rates could backfire and worsen Canada’s economic struggles.

Spencer Fernando