The Bank of Canada today is holding its key rate at 1 percent, after two increases early this year. According to the BofC’s press release, it must proceed with caution:
Based on this outlook and the risks and uncertainties identified in today’s MPR, Governing Council judges that the current stance of monetary policy is appropriate. While less monetary policy stimulus will likely be required over time, Governing Council will be cautious in making future adjustments to the policy rate. In particular, the Bank will be guided by incoming data to assess the sensitivity of the economy to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.
Although the talk of “two consecutive rate hikes” in the print media might give the impression that the Bank of Canada is suddenly hawkish, the reality is that the Bank, like the Fed, is nowhere near normalization, since the target rate was over four percent a decade ago, and has been at or below one percent for more than eight years.
The Federal Reserve and the European Central Bank have been holding their target rates at 1.25 percent, and 0.4 percent, respectively.
Canadian central bankers are concerned about NAFTA, about Trump’s protectionism — including a new tariff slapped on lumber — and lackluster growth in general.
The Bank doesn’t come right out and say this, of course. The rhetoric employed here is similar to what is found with the Fed, and is always cuatiously upbeat, even though its reluctance to normalize rates illustrates fear of upsetting the fragile economy. According to the official line, the Canadian economy was “stronger than expected” earlier in the year, but we must not get carried away, since the economy is now “expected to moderate to a more sustainable pace.”
One of the biggest concerns for the bank, apparently, are the high debt levels adopted by Canadians. The Bank notes “Because of high debt levels, household spending is likely more sensitive to interest rates than in the past.”
This has apparently been a topic of discussion in the Canadian media with numerous articles on how Canadian households aren’t prepared for rate hikes, given their debt levels. A new survey released this month about Canadian households concludes:
- - Over fifty per cent say they are $200 or less per month away from not being able to meet all of their bills or debt obligations each month.
- - Six in ten say that they are less than very confident in their understanding of the impact of interest rates on debt payments and about their ability to set and follow a budget.
- - Nearly half say they are concerned about their current level of debt.
- - Nearly four in ten regret the debt they’ve taken on in the past year alone and half say they regret how much debt they’ve taken on in their life.
