The Bank of Canada announced today that it is leaving its key interest rate unchanged, and repeated its commitment to hold the rate steady until the second quarter of 2010, conditional upon inflation.
In its statement the Bank judges that the factors affecting its inflation outlook are “roughly balanced” at this time. “On the upside, the main risks are stronger-than-projected global and domestic demand. On the downside, the main risks are a more protracted global recovery and persistent strength of the Canadian dollar.”
The Bank also noted that “the economy grew at an annual rate of 5 per cent in the fourth quarter of 2009, spurred by vigorous domestic spending and further recovery in exports.”
There are several reasons for the Bank of Canada not to increase rates;
The strong Canadian dollar has put Canada into a trade deficit for the first time in many years. Increasing Canadian interest rates ahead of US rates would likely increase the Canadian dollar and hurt our exports just as a recovery is getting underway and the Bank of Canada does not want to do that.
Inflation remains below the Bank of Canada target of 2% and there is enough capacity in the economy to absorb increased demand without driving up prices. Also the strong Canadian dollar has held inflation down.
Bond investors seem content with these rates. If investors expected rates to rise substantially we would already be seeing the effects in the form of higher yields in the longer bonds and this is not happening.
This is not to suggest that rates will never go up, just that it is not going to happen as quickly as some borrowers are fearing. Of course if it helps a client to sleep at night there is nothing wrong with taking a 5 year fixed at these low rates either. But the variable rate does remain an attractive option.