Interest Rate Outlook for the Future

The Rate Outlook Changes Little With Poloz & Co.

Stephen Poloz’s first interest rate meeting as Bank of Canada governor is now in the books. The result: The Bank left the country’s core lending rate at 1%, which means prime rate will stick at 3%.

What the market really wanted to know, however, was what Poloz would say about the BoC’s rate hike bias.

As it turns out, there now appears to be slightly less urgency to raise rates down the road. The Bank’s key message was:

“Over time, as the normalization of…conditions unfold, a gradual normalization of policy interest rates can also be expected, consistent with achieving the 2% inflation target.”

(“Normalization” of conditions refers to inflation back above 2% and growth back to potential, says Action Economics.)

That said, Poloz clarified during his press conference that the BoC’s forward-looking language is not an attempt to signal a rate hike. It’s more of an explanation of how things may unfold if the economy performs as expected.

The Bank added:

• “Total CPI inflation has [partly] been restrained by declining mortgage interest costs.” (But this factor will be reversed somewhat due to the recent jump in rates.)
• “…Both core and total CPI inflation are expected to return to 2% around mid-2015.” (Rate increases will likely be moderate so long as inflation stays near or below 2%.)
  
  [Comments in italics are CMT’s.]

Prior to today’s meeting, the market expected 1/4 point of rate tightening by September 2014. Today’s announcement may push that back a bit.

The 5-year bond yield, which guides fixed mortgage rates, moved very little after the Bank’s announcement. It was at 1.66% at the time of publication.

The next BoC rate meeting is seven weeks away on September 4, 2013. That meeting will mark three years since the BoC last lifted rates.

Rob McLister, CMT