The Bank of Canada surprised some in Canadian cities like Grande Prairie by keeping interest rates steady at 1.25% while hinting they’d raise it eventually by the third quarter. In theory, they’d need to raise the benchmark rate to 1.75% to hit normal rates. Yet they’re afraid to do so. Let’s look at some of the reasons the financial stimulus of low interest rates has yet to be eliminated making it a perfect time to buy. Contact a Grande Prairie Mortgage Broker today to secure your interest rate at an all time low.
Governor Poloz said that GDP grow was weaker than expected in the first quarter, though he expected foreign trade expansion to cause it to rebound in the second quarter. If that happened, then they’d see a rate hike. Fourth quarter 2017 growth was weaker than expected because of higher imports and a surge in housing before new rules went into effect, while 2018 could slow down more than planned after the housing market cools down.
Mr. Poloz said in his press conference announcing that interest rates were remaining the same, “We have little more room for demand growth within our 2-percent-inflation target than we believed before.”
Wage growth is improving in Red Deer and throughout Canada, though it is below expected levels given employment levels. Unemployment has fallen to 5.8%, the lowest rate in at least forty years. This led the Bank of Canada to revise up the potential growth estimate from 1.4% to 1.8%.
The central bank has the goal of keeping the Consumer Price Index at 2%. This is the middle of the acceptable range of 1% to 3%. The latest forecasts show inflation at around 2% for the rest of 2018, while the tentative projections for 2019 put it at 2.1%. A higher rate of inflation would warrant an increase in interest rates.
As long as Canada’s economic engine can continue to grow at this rate without generating higher inflation, there is no need to increase interest rates. Making it a buyers market in the Red Deer Area.
Trade Wars Looming on the Horizon
President Donald Trump threatened steel and aluminum tariffs in addition to his general promise to renegotiate NAFTA more in the United States’ favor. Central bankers are using the “room for demand growth” cited by Mr. Poloz to prop up weakened exporters of non-energy durable goods. Canada’s latest quarterly economic outlook noted strong international sales by service providers and higher crude prices, but exports in other areas is underwhelming. Canadian exporters are losing market share in the United States, which NAFTA renegotiations could hurt even more, and they’re losing share abroad. The losses in markets outside North America are partially due to Canada’s relatively high cost of operations. Transportation bottlenecks and shortages of skilled labor contribute to business woes.
This erosion of the export market caused the central bank to reduce its economic forecast for 2018 from 2.2% to 2%. They initially expected exports to contribute 0.6% to GDP, whereas now it is expected to be essentially none. Robust domestic demand makes up the difference, but that’s only possible as long as interest rate hikes don’t make debt-laden households unable to continue buying because they’re too strained just making their debt payments. Others argue that slower credit growth could mean Canadian households are adjusting to the higher borrowing costs but still able to buy.
Fear of a trade war has also slowed business investment in Canada. Why build a factory there to export to the rest of North America if higher tariffs wipe out the economic argument for doing so?