Latest Bank of Canada rate announcement shows optimism

Yesterday, the Bank of Canada announced that it is keeping its overnight lending rate steady at 0.75 per cent. The BoC surprised experts by dropping its rate from 1 per cent in January, an attempt to stimulate the economy in light of falling oil prices.

Following the BoC’s announcement in January, the loonie fell in value to its lowest point since April 2009. But based on the optimism of the bank’s latest announcement, the Canadian dollar (which had fallen as low as 78 cents in recent months) surpassed 82 cents U.S. today.

In its announcement, the bank predicted that global growth will strengthen and average 3.5 per cent per year over 2015-17. It also anticipated that a weak first quarter in the United States will be followed by stronger growth over the next quarter.

According to the BoC’s announcement:

“The very weak first quarter has led to a widening of Canada’s output gap and additional downward pressure on projected inflation. However, the anticipated recovery in growth means that the output gap will be back in line with its previous trajectory later this year … Risks to the outlook for inflation are now roughly balanced and risks to financial stability appear to be evolving as expected. The Bank judges that the current degree of monetary policy stimulus remains appropriate and therefore is maintaining the target for the overnight rate at 0.75 per cent.”

May 27 is the BoC’s next scheduled date for announcing the overnight rate target. It will also publish the next full update of its outlook for the economy and inflation on July 15.

Meanwhile, the BoC is also predicting a soft landing for Canada’s housing market, which some experts had said was headed for a correction. However, a more dramatic housing correction is still within the realm of possibilities and could negatively impact borrowers across Canada. High pricing and household debt levels continue to raise concerns with the central bank, but the housing markets outside of Vancouver and Toronto have moderated in the past few months. The BoC notes that resale activity remains strong and housing prices remain high in those two key real estate markets.

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