Bank rate holds steady in September

The Bank of Canada kept its benchmark overnight lending rate steady at 4.5 per cent on September 5th. The trend-setting Bank rate, which is set 0.25 percentage points above the overnight lending rate, remains at 4.75 per cent. 

In a marked departure from recent statements made by the Bank in recent months, the announcement included no mention of the need for further interest rate increases to reign in inflation. Instead, the Bank emphasized a marked increase in uncertainty about the prospects for Canadian economic growth.

The Bank indicated that economic growth in the first of the year was stronger than expected, and that “it now appears that the Canadian economy is operating further above its production potential than was estimated in July.”  Such statements are normally accompanied by a message that interest rates will need to rise to prevent economic growth from fueling inflation. However, the Bank also identified that spillover from the U.S. sub-prime mortgage market meltdown into the broader financial market “have led to some tightening of credit conditions for Canadian borrowers, which should temper growth in domestic demand.”

The Bank also said that the ongoing adjustment in the U.S. housing sector “could be more severe and spill over to the U.S. economy more broadly.” It also identified “uncertainty about the extent and duration of the tightening of credit conditions in Canada and, hence, about the tempering effect this will have on growth in domestic demand. “

“The decision by the Bank of Canada to hold interest rates steady was widely expected,” said CREA Chief Economist Gregory Klump. “By making no mention of the need for further interest rate increases, the Bank has signaled it will stay on the sidelines until financial market vertigo subsides, and the outlook for economic growth becomes clearer.”  The next rate announcement is scheduled for October 16th. 

When the Bank decided to raise interest rates steady on September 5th, the advertised conventional five-year conventional mortgage rate stood at 7.24 per cent – up 0.29 per cent over the peak reached last year. Competition among mortgage lenders remains stiff, which continues to help many borrowers negotiate discounts of one per cent or more off advertised rates.

The rise in mortgage interest rates since June likely encouraged many prospective buyers with pre-approved mortgages to get into the market before their lower pre-approved rates expired, and caused resale housing activity to accelerate.  Once higher interest rates start to bite, resale housing activity will gradually ease back from the strong pace seen in the first half of the year.”

An increase in interest rates was factored into the CREA MLS® 2007 market forecast issued in August. “Sales broke all previous records in the first half of 2007, which will push annual MLS® home sales activity to new heights this year and reach the second highest level on record next year. Prices are also forecast to continue rising over the next two years,” Klump added. (CREA 05/09/2007)