Bank of Canada holds off interest rate increase

Bank of Canada holds interest rates despite inflation and NAFTA uncertainty



Canada’s annual inflation rate, also called consumer price index (CPI), rose to 3 per cent in July, for the first time in seven years. Last time CPI hit 3 per cent was back in July 2011. This time around, drastic increase was quite unexpected. Just one month earlier CPI was at 2.5 per cent mark. The Canadian market proved to be unexpectedly hot, despite the Central Bank’s latest efforts to cool it down.


Normally Bank of Canada (BoC) aims to keep inflation at around 2 per cent, although anywhere in the range of one to three per cent is acceptable. Currently prices reached the upper limit of the acceptable range, and experts are confident that new interest rate hikes are coming before the year end.


Policymakers anticipated an increase in inflation rate in the second half of 2018. Higher gasoline prices, higher minimum wage and retaliatory tariffs were supposed to temporarily raise CPI, before dropping back down approaching 2019. However, nobody expected it to hit 3 per cent this year.



Is new rate increase expected?


Canadian economists, including CIBC and Bank of Montreal experts, predicted a new interest rate increase in the coming months. However, it is unclear whether it will happen in October or some time in 2019. While three per cent inflation rate calls for action from the Bank of Canada, policy makers will likely need more time to understand the most important factors which drive prices up. In the latest statement Bank of Canada says that they will hold off rate increases for now.


Furthermore, the bank is closely monitoring NAFTA negotiations and other trade policies in order to assess their impact on inflation. BoC considers trade tensions to be dangerous for global economy. Currently Canada and the US are negotiating some key issues such as Canada dairy market policies. Canada is already facing US tariffs on steel and aluminum as a result of these talks.


Despite the uncertainty in trade agreements, business investments and exports are showing continuous growth. Unexpectedly, the economy is showing significant growth, and so do prices. Thus, interest rate increase is likely in the near future. The date set for the next rate announcement is October 24th, however NAFTA deal in the next few weeks may speed up the process.

Price changes as of July 2018


July statistics show increased costs of air transportation (28.2 per cent) and gasoline (25.4 per cent) compared with last year. Prices of restaurant food jumped by 4.4 per cent and mortgage costs rose 5.2 per cent. On the other hand, phone services dropped by 5.1 per cent, and travel accommodations dropped 4.1 per cent compared with 2017. The impact of Canada`s tariffs on US metal and consumer products, however, was minimal.


What does this mean for homebuyers?


Potential homebuyers and home owners should be aware of the future changes. We will continue to follow BoC announcements and will keep our clients informed on coming policies. Why is this important? If BoC decides to implement rate changes, variable rate will likely increase, putting more pressure on some mortgage holders. In this case acting smart and quick will save you thousands of dollars. Our team can help you switch from variable rate to fixed, or decrease your variable rate before rate changes come into effect. We always try to educate our clients, since a few simple steps may save them lot of money.

We are here to help. Contact us today for a free no-obligation consultation.
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