The Bank of Canada held its trendsetting interest rate at 0.75 per cent on Wednesday, an expected move as the central bank enters a holding pattern to evaluate the effect of lower oil prices on the Canadian economy.
The bank is also contending with a rising tide of household debt, itself a significant risk to the economy that was further reinforced in January when the bank last cut its benchmark rate. The January cut has consequently helped drive up sales of big-ticket items like real estate and new vehicles amid already record debt levels.
With that in mind, Governor Stephen Poloz elected Wednesday to hold rates steady. “The Bank of Canada today announced that it is maintaining its target for the overnight rate,” a statement said.
Surprise cut
Before last week, experts were near unanimous in their opinion that Poloz would cut the bank’s trendsetting rate again by a quarter of a percentage point, to 0.50 per cent, a cut that would add to the quarter-point cut made in January when oil prices were still retreating rapidly.
That cut , from 1.0 to 0.75 per cent took many by surprise – and highlighted central bankers’ concerns about the health of Canada’s economy given the massive plunge in crude since the summer.
Canada’s central bank is responsible for influencing interest rates charged by private banks and lenders, as well as managing other high-level monetary matters to keep the financial system stable. The bank’s overnight lending rate has a direct effect on interest rates on products like variable mortgages, lines of credit and other forms of debt.
The cut might not sound like much, but the surprise move was the wrong direction financial experts want rates headed in as consumers confront record debt loads. A new report from credit-monitoring agency Equifax released on Tuesday showed Canadian consumers continuing to tap more credit despite countless warnings about elevated leverage among households.
MORE: Rate cut isn’t green-light to borrow more, experts say
Oil shock
Still, the immediate risks for the national economy presented by plunging oil prices outweighed consumer debt considerations, the bank said in January.
Economic conditions have since performed better than expected. But experts said Wednesday further interest rate cuts could well be in the pipeline if things deteriorate through the spring. “The market is still pricing in reasonable odds of a follow-up rate cut in the coming months, as evidence of the economic damage from low oil prices mounts,” BMO chief economist Doug Porter said.
In a Feb. 24 speech, Poloz suggested the January rate cut had bought the bank some time to see how the economy reacted to lower oil prices. The bank’s statement on Wednesday suggested the worst of the oil shock will be felt in the first six months of the year.
“The Bank continues to expect that most of the negative impact from lower oil prices will appear in the first half of 2015, although it may be even more front-loaded than projected in January.”
Big-ticket spending
BMO’s Porter said the national economy appears to be holding up well outside of Alberta, where plunging oil prices are taking the deepest toll. Statscan said Tuesday economic growth topped 2.4 per cent in the final quarter of 2014, a better than expected showing.
Yet the sustained strength appears to be driven by the continued rise in consumer borrowing, something January’s rate cut has spurred on.
Home sales continue to rise strongly in places like the Fraser Valley and Victoria in British Columbia. The average price of a detached home in Toronto, meanwhile, just surpassed $1 million, according to the city’s real estate board.
Auto-makers reported this week they had their second-best February for Canadian sales on record, led by a surge in bigger vehicles like light trucks and crossovers.
“So, interest-sensitive spending remains strong, after the bank threw another log on the fire in January,” Porter said.
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