The Bank of Canada has just met for its first interest rate decision of 2018. Stephen Poloz, the Bank of Canada Governor, has cited positive economic data over the course of the fall. This unexpectedly high data has led the Bank of Canada towards the decision to increase interest rates for the third time since the summer. Rates have increased from 0.50% to a total of 1.25%. Analytics, economists, and bankers widely expected this decision.
Stephen Poloz talked at length about the fact that the bank will be proceeding cautiously moving forward, as they expect that the growth in the economy may begin to level out and slow. They don’t expect us to continue to perform at such exceptionally high levels of growth. They also cited the unknowns surrounding NAFTA. Currently, Canada, the United States, and Mexico are all under negotiations regarding this trade agreement, which could have a significant impact on the economy. This is a result of Donald Trump and the United States’ decision to renegotiate the pact, and it’s unknown whether NAFTA will be canceled entirely or whether it will simply be adjusted. If it is adjusted, the type of adjustments and what those impacts might be are also unknown. All of this creates massive levels of uncertainty.
The Bank of Canada wanted to be very cautious right now and make sure they are factoring in any potential economic consequences of this trade deal, but that isn’t all they considered. The Bank of Canada also cited high household debt and consumer debt; they are being cautious about bringing rates up too high too quickly, as they do understand that the debt levels right now in Canada are quite high. They also don’t want to slow the economy or cause any unforeseen issues as a result of consumers being unable to pay their debts. Even though the rates should be much higher, these low interest rates are designed to stimulate the economy. A consequence of our historically low interest rates is that record high levels of debt have been created.
In general, our economic situation continues to look positive. Regardless of the consequences of NAFTA and other related issues, the economy should have a great year ahead of itself for 2018. Rates have moved up to 1.25% and have increased multiple times in the past six months, and though that may appear to be a negative, the rates are still much lower than they should be. The Bank of Canada believes that in any normal circumstances, based on our economic performance, the rates should be between 2% and 3%. Again, because of the very fragile nature of the economy and the balancing act in play here, rates are being held artificially low to continue stimulating the economy. It’s important to note that the rate increases are a good thing, as they indicate that the economy is improving despite any potential complications.
For home buyers, this means that buyers still have a chance at getting great rates. Rates are still historically low and if you listen to Poloz they’re still at about half of what they should be. Lending is never going to be this cheap again. Given time, rates will be adjusting accordingly — all based, of course, on how the economy is performing. This is a great time to get in the market, as the economy is performing exceptionally well, interest rates remain low, and home prices are continuing to rise.
For home sellers, this means that it’s still a great time to sell. Historically low interest rates will continue to fuel positive activity in the market, encourage buying, price growth and keep inventory tight.
The next meeting to discuss rates will be in March.
