Bank of Canada Holds Rates in April, but Future Hikes Coming Soon…

Bank of Canada Holds Rates in April, but Future Hikes Coming Soon…

Bank of Canada holds rates in April

Canada’s central bank, the Bank of Canada, recently left interest rates untouched and cited data that’s much weaker than expected for the year’s first quarter.

In its Monetary Policy Report, released in April 2018, Bank of Canada noted that the Governing Council collected and analyzed recent data carefully.

During its analysis, the Governing Council concluded that weak performance during the first quarter of 2018 is mainly due to two factors:

  1. An unforeseen drop in exports, and;
  2. New mortgage rules.

Bank of Canada added that the new stress test pushed housing sales into the fourth quarter of 2017. The stress test took effect at the start of this year.

Following its rate decision, Bank of Canada Governor Stephen Poloz, said economic activity is expected to pick up later in the year.

Bank of Canada expects the housing sector to be more regulated this year, compared to 2017. And, it also noted that it’s anticipating a partial recovery during the second quarter.

The bank believes Canada’s economy will be able to operate above its potential to some extent in the next three years, with a real gross domestic product growth of approximately 2% in 2018 and 2019, and 1.8% in 2020.

Future hikes likely to happen soon

Different experts and analysts have examined the Bank of Canada’s decision, saying that the bank’s forecasts and comments for the next quarter will leave rate hikes on the table for this year.

Benjamin Reitzes from BMO Capital Markets noted that due to the upbeat tone of Bank of Canada’s statement, it will likely remain on a slow but stable rate hike path. He also stated that they’re still comfortable with their recent prediction of a rate hike in July.

Reitzes noted that the Bank of Canada’s sharp forecast for the next half of 2018 suggests the bank is searching for housing stability over the next few months, at least.

Overnight Index Swap markets are currently working on two more rate hikes in 2018.

Canadian Imperial Bank of Commerce economists pointed out the differences in Bank of Canada’s statement, which highlighted a surge in inflation and a little sluggishness remaining in the economy. Economists referred to increasing global risks and the never-ending need for monetary policy accommodation.

They concluded that there will still be a central bank that’s willing to gradually increase interest rates. Their prediction for the next hike in July remains, followed by a hold for the remaining months of 2018.

Great news for homeowners

Canada’s variable rate mortgage holders have already noticed an increase in their monthly payments. The change resulted in an increase of around $35 a month for every $100,000 of mortgage since July 2017. For these mortgage owners, the rate hold was welcome news.

Bank of Canada’s 75 bps of increases since last summer have already pushed mortgage costs to up to four-year highs. This is beginning to have an impact on homebuyers’ psyche.

Royal Bank of Canada’s latest Home Ownership Poll showed that Canadians are becoming increasingly concerned about rising rates and are considering changing their homebuying plans.

The survey reveals that 61% of Canadians say that they are now “somewhat” or “very” anxious about the growing interest rates, compared to just 51% in the past year.

In response, 35% of residents say they’re currently deciding whether they can make a purchase in advance to take advantage of low-interest rates. And, 32% are thinking of purchasing their home earlier than planned to join the market ahead of predicted hikes.

Bank of Canada’s next rate decision is expected to take place on 30th May.