Bank of Canada holds rates, sees no cooling in housing yet

The Bank of Canada is expected to stick with its benchmark interest rate Wednesday even though the economy is off to a stronger-than-expected start in 2017.

One positive takeaway is its view that the Canadian economy's adjustment to lower oil prices is now complete, largely why rates were cut from one per cent to half a per cent in the first half of 2015. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.

"If, as we expect, Trump's ability to swing policy to a truly more protectionist stance is constrained by Congress and some of the wiser voices in the White House, reduced fears of USA trade barriers should pave the way for 50 bps in Canadian rate hikes by early 2018, if not a bit sooner", the economist said. Most economists expect the bank to stay on the sidelines until 2018 before tinkering with its interest rate. Roughly three-quarters of Canadian exports, or the equivalent of 20% of the country's total economic output, are US -bound.

"This is no longer a decidedly neutral stance from the Bank of Canada", said Jimmy Jean, economist at Desjardins Capital Markets in Montreal. That signals the entire economy has yet to catch up to the recent momentum. Meanwhile, export growth remains subdued, as anticipated in the April MPR, in the face of ongoing competitiveness challenges.

Consumer spending and the housing sector continue to be robust on the back of an improving labour market, and these are becoming more broadly based across regions.

British Columbia's move to tax foreign buyers in the Vancouver area has sparked a sales slump, while a similar move by Ontario to cool down the markets in and around Toronto is too recent to gauge. Macroprudential measures are likely to add to more sustainable debt profiles, but are not seen to have had any significant easing effect to date.

The next Bank of Canada rate decision is July 12, at which time it will update its economic outlook.

  • Zachary Reyes