September 3, 2014 BoC Rate Announcement

The Bank of Canada has again decided to keep their key overnight lending rate unchanged. This, despite the fact that inflation (CPI) has moved closer to the 2% target. The Bank's key rate directly influences the Prime rate which is the index rate used for floating/variable rate lending.

There continues to be no reason for variable rate mortgage holders to have concern, at least for the foreseeable future. The last time that the Prime rate of interest changed was September 2010.

Core Inflation, (rather than CPI) is the metric that the Bank really cares most about. It continues to sit significantly below the 2% mark.

CPI (or Consumer Price Index) inflation tracks the movement of consumer prices over time including volatile components such as fruit, vegetables, gasoline, and mortgage interest, to name a few. Core Inflation "looks through" those volatile factors which cause temporary fluctuations in prices, offering a better representation of the overall direction of inflation.

Because Core Inflation is still quite low, the Bank will likely hold off raising interest rates for a while. Other secondary factors that influence the Bank’s decision are: 1.) the performance of the Canadian economy, 2.) US economy and 3.) the rest of the world's economy. Global economic growth in the first quarter of 2014 was weaker than anticipated. The US economy has shown mixed signals and is in a slow growth progession. The Canadian economy grew modestly in the first quarter.

Long-term bond yields have also continued to decline, an indication that financial markets anticipate interest rates will remain low for quite a while.

If you need a mortgage; or if you’re looking to renew; and you’re wondering if a variable rate makes sense for you, contact us.  Mortgages are not "one-size-fits-all".  We'll find the product that best fits your particular needs.

Harrison W Grant, doctor Chief Economist, dosage Mortgage Logic
Today the Bank of Canada (BoC) announced that they will not adjust their Key overnight lending rate (1%) which directly affects the Prime rate (3%) used by major Canadian FI's. 2014 year has seen a Canadian dollar continue to weaken to the US dollar. The Canadian dollar is trading near $0.91 USD . The US Dollar has been gaining strength as the US economy has climbed out of the worst recession since the 1930s. Five years after near economic collapse the US is indicating intentions to raise their key interest rate when possible.
Being each others largest trading partners it would seem as the US goes so should Canada, but this is not the case. The Canadian economy has grown sluggish as the US economy has improved. Why?
The Canadian economy is a natural resource based economy and the demand for natural resources has remained lower around the world, especially with the largest consumer – China.
U.S. consumers saved more per dollar earned last month than they have in a year and a half. Their propensity to consume has lowered as the USD rises the two factors nearly balance each other out. This occurring even with economic stability gaining momentum in the United States.
Below normal weather thus far in 2014 has slowed the Canadian economy.
Therefore the BoC is NOT as hawkish on reducing stimulus (raising rates), even under the backdrop of slightly rising inflation. Canada has seen an accelerated inflation rate this year €“ February where the inflation rate was at a 2014 low at 1.1%, currently now (last reported) at an average inflation rate of 1.85%. Even though with US Dollar rising in value and the Canadian Dollar weakening the Canadian industrial complex lacks the needed output (not near full capacity) to fuel such an interest rate increase.
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