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Canadian Rates Remain the Same, But Not Indicators
The Globe and Mail published an opinion calling the plan by the Central Bank of Canada to leave the rate at 1.75 percent no big surprise.
But as is often the case, there is more to the declaration than meets the eye. In the opinion piece, which was written by an economics professor at the University of Quebec, it was said that the global economy had a positive influence on the Canadian economy. This was a reversal of previously held beliefs that the global economy was a “drag” on the Canada.
Signs of hope for the global scene were supported by evidence from the International Monetary Fund, as reported by the CBC. The organization said in October world economic growth should increase to 3.4 percent, an increase from 3.0 percent the year before. The author also said updates on to trade talks between China and the United States could increase the prospects for Canadian businesses, particularly those that are suppliers to companies in the United States.
On the domestic front, the Bank said there is weakness at home. This, according to the piece, was also a reversal of what the bank reported in the fall. At that time, Canada was strong enough to withstand turbulence from around in the world, which saw decreases in interest rates in multiple countries. But weakness in the fourth quarter, indicated by a slowing in exports coupled with weakness in business investment, led the bank to lower Canadian GDP from 1.7 percent to 1.6 percent.
The opinion piece pointed to other factors in the rate decision, including the recent employment statistics. The author says the outlook on this front is muddled based on a couple of indicators. It said there is a low unemployment rate, which was at 5.6 percent as of December, and wage growth was listed at 3.8 percent. That latter figure was down from the previous month when it topped 4.4 percent. While this hinted at increases in inflation, and thus a bump in the interest rate, other factors caused the Bank to hold back.
One factor was the tepid increase in the number of hours worked by employees, which rose by only 0.3 percent. This suggests the job market is not as strong as some of the employment statistics indicate.
The author concludes economic signs point in a few different directions, making it difficult for the Bank to make a decision on rates. But, the author writes, at least the Bank had an influence on the domestic market.
The coronavirus is a new factor in the Canadian rate watch. According to an article in canadianmortgagetrends.com, the mortgage rate has taken a hit from the virus, which originated in the Wuhan region of China. The TSX fell 142 points after it was reported that more than 100 died in China and the five-year bond fell to a three-month low. This likely means mortgage rates are expected to drop, according to the article.
The author quotes Rob McLister, the founder of RateSpy.com, who said the SARS contagion in 2003 “dragged” the Canadian GDP a tenth of a percentage point. The coronavirus could have a similar effect. The Bank said in its report announcing rates will remain the same that they too are tracking the virus and possible impacts on Canadian rates.
Mortgage rates, according to the article, have already been on a downward trend. The rate fell to two-year lows to 2.79 percent for a “full-featured” five-year mortgage and could continue to go lower if the bond rate continues to fall. The rate, according to the article’s forecast, could drop to as low as 2.5 percent according to the article.