Interest Rates Stay in the Basement… Maybe Till 2014

The Bank of Canada surprised most analysts Wednesday by cutting Canada’s 2013 growth estimate (to 2.0%) and calling the timing of the next interest rate hike “less imminent than previously anticipated.”

The BoC has used the “less imminent” wording before, but not in any recent rate decision statements. It attributed its position, in part, to “more muted inflation” and cooling household debt levels.

The decision leaves Canada’s prime rate stuck at 3.00% for the 27th straight month—to the delight of most variable-rate mortgage holders.

These were some highlights from the announcement:

• “Core inflation has softened by more than the Bank had expected…”
• “…global tail risks have diminished.”
• “Caution about high debt levels has begun to restrain household spending.”
• “…exports should remain below their pre-recession peak until the second half of 2014…”
• “…Some modest withdrawal of monetary policy stimulus will likely be required over time…”

The benchmark 5-year bond, which is closely correlated with fixed mortgage rates, fell 5 bps to 1.41% on the Bank’s decision.

Economists will now likely revise their rate hike calls (which have proven hopelessly non-predictive) to late 2013 or early 2014.

The next Bank of Canada Rate meeting is six weeks away on March 6.

One interesting side note: The Bank added that household debt growth has eased to just 3%. That’s the weakest annualized rate since 1999 and it reflects “a slowdown in the growth of both residential mortgage and consumer credit.”

Canadians are both voluntarily heeding government debt warnings and being forced to heed them through stricter lending rules.