The Bank of Canada announced on Wednesday that it will keep its benchmark interest rate at 1.25%. While many expected a hold, investors were uncertain and felt that a surprise hike was on the horizon. The primary concern stemmed from the bank’s previous decisions, which raised the key lending rate thrice since last July.

“We think the bank is on track to raise rates by July,” said BMO Capital Markets Senior Economist Sal Guatieri. “Clearly, any bad news on the trade protectionism front or NAFTA talks would delay the Bank of Canada, or if we see the housing market weakening more than expected in response to the tougher mortgage rules.”

The news that interest rates would not be increasing was well-received by homebuyers looking to finance their mortgages, renovations, and other expensive projects. The bank’s rate directly impacts rates that are available to Canadians for savings accounts, debts, and lines of credit.

The bank also warned that rates will eventually hike due to inflation. The bank also anticipates higher gas prices and minimum wage hikes to impact inflation in the short term, though it is projected that the rate will hover around 2% over the medium term.

However, Bank of Canada does not know when these hikes will occur or how aggressive it will need to be to keep inflation in check. Regarding the bank’s concerns over inflation and minimum wage growth, Governor Stephen Poloz stated that policymakers have noted a gradual decline in the need for monetary stimulus.

“Most of our deliberations, therefore, concerned the appropriate pace of interest rate increases,” said Poloz at a news conference.

“Inflation’s at 2%,” said Governor Stephen Poloz at a press conference following the decision. “That’s a good starting point because that’s the destination.”

The bank also agreed that policymakers are cautious regarding future rate changes, especially as households manage higher borrowing costs and tighter mortgage rules affecting the housing market.

“There are things acting on the economy, some of which are a legacy of the financial crisis, the accumulation of debt, the uncertainty around NAFTA, the competitiveness challenges… It is a long list of things that are in the background that would be preventing the economy from getting all the way where it is today, all by itself,” said Poloz.

Along with the decision to hold the current interest rate at 1.25%, the bank also announced the following :

• Current estimates of underlying wage growth are at 2.7%, up from 2.3% in the fourth quarter of 2017 and 1.1% in mid-2016.
• A 3% rate of growth has been consistent with an economy with no labor market slack.
• Income growth remains strong despite higher legislated minimum wages.
• The bank continues to assess labor market data for signs of slack.
• Job vacancies are significantly higher than is typical with the annual expansion of employment.
• Higher labour force participation, particularly in the United States and Europe, bolsters global growth potential.

Following the decision, the Canadian dollar to slightly weaken against the US counterpart. The Bank of Canada also stated that exports faltered in the first quarter. While they are expected to pick up, it will not be enough to recover lost ground.

No Interest Rate Increase from The Bank of Canada by Condo.ca