While some experts may have toyed with the idea that the Bank of Canada would actually lower its lending at the historically low rate of 1% it’s been at since September 2010, it was announced yesterday that it would remain the same. What did change was the positive tone of the statement. While all other announcements have been followed with the gloomy overview of the financial crisis in Europe and the trouble in the States, this time we see a glimmer of hope – which could also mean that interest rates are going to rise much earlier than expected.
In the statement, along with the news about the interest rate, the Bank also stated, “With tentative signs of stabilization in European bank funding and sovereign debt markets, conditions in global financial markets have improved and risk aversion has decreased. However, the global economy is still expected to grow below its trend rate as the deleveraging process is advanced economies proceeds.” The statement also touched on inflation, saying “the profile is somewhat firmer than previously anticipated as a result of reduced economic slack and higher oil prices. After moderating in the second quarter, total inflation is expected, along with core inflation, to be around two per cent over the forecast horizon, reflecting the combination of modest growth of labour compensation, an economy operating around its potential over time, and well-anchored inflation expectations.
News of the unchanging rate is good for anyone looking to get a Toronto mortgage, but the bank remains concerned about the debt levels Canadians are currently carrying. Along with all the good news about the global economy in the bank’s statement, it also cited household debt as “the biggest domestic risk.” It’s not surprising the bank feels that way. Mark Carney and Finance Minister Jim Flaherty have been warning us for well over a year that our household debt levels are far too high (currently standing at 153% in fact,) and just a couple of weeks ago the Bank of Canada warned us that we were relying far too heavily on our home equity, going into debt further with HELOCs and home equity loans.
The only question that comes now is: will the Bank raise its interest rate this year? Before yesterday’s announcement, experts and analysts expected the Bank to keep its lending rate at 1% well into 2013. But with the new positives coming into play, fewer negatives, and the Bank more worried about our debt than ever before, they very well could raise the rate in order to stop our borrowing and get household debt to return to normal levels.
The good news is that if that happens (and yes, it’s still a fairly big “if” at this point,) it most likely would not jump by very much. The Bank lowered that rate in order to balance out our economy and return it to pre-recession levels. And raising the rate too high and too fast will just undo all their hard work.
