Join us in this three part series on Canada's financial perspective featuring blogs on the (1) Mortgage Rate Outlook (2) Economic Outlook and (3) Interest Rate Outlook

Interest Rate Outlook

The Agreement between the Bank of Canada and the Goverment of Canada for the Inflation-Control Target was renewed in 2016. The Bank of Canada has a mandate to keep an inflation-control target range of 1-3% with 2% as being the midpoint target over the medium-run. This target is the year-over-year increase in the total consumer price index (CPI) which is the most relevant cost of living measure for most Canadians. Keeping the inflation target in mind, the Bank of Canada has to maintain a delicate balance given the current state of the economy as well as inflation trending near its target

The low oil prices have taken a snowball effect as it continues to increase unemployment in energy producing provinces while simultaneously causing a weaker Canadian dollar which in turn makes the cost of imported goods more expensive. The BCREA expects a continued weak economic growth for the first quarter. However, with "the possibility of an effective fiscal stimulus, a stronger US economy and a stabilization of oil prices points to stronger growth ahead" (BCREA, 2016).

"After standing on the sidelines for years, the Bank unexpectedly cut its benchmark [interest] rate twice last year in an attempt to stimulate a Canadian economy waylaid by low oil prices" (CBC, 2016). Since then, there have been some signs of improvement. There is potential for the Bank of Canada to reduce rates once more in 2016 although the BCREA's expectation is that the Bank will remain on the sidelines throughout the year. The Bank of Canada has elected to keep its benchmark lending rate at 0.5%. In a broad sense, the Bank will reduce rates when the economy needs to be stimulated or alternatively, would increase rates when it needs to pump the brakes on inflation. 

Source: British Columbia Real Estate Association + CBC Business

Thanks for joining us in this three part series on the Canadian Financial Outlook. For all your real estate needs, contact Amalia Liapis at amalia@wesellvancouver.ca or alternatively, at 604-618-7000.

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With a considerable increase in energy costs followed by an incline in Canadian inflation rates in the recent months, there is some speculation that the effect on the consumer price index (CPI) caused by high energy costs should fade later this year. CPI is the Bank of Canada's preferred measure of inflation. There does seem to be some underlying momentum in core CPI which, if kept continuing, will be much harder for policymakers to brush aside.

Global economic growth was weaker than forecasted for the first quarter in 2014 but is expected to pick up in the second half of the year. As for now, the rates are anticipated to remain unchanged until 2015. There is much consideration that the new normal for interest rates is that it will be much lower than previously. The interest rate will see fluctuations in the short-run, however, in the long-run, the interest rate should be in line with the economic growth.

Canada's potential growth rate has slowed down in the recent years due to the low productivity growth, the global financial crisis aftermath and the aging workforce. The Canadian labour force growth is correlated with the production of goods and services growth. Thus, both growth rates will follow the same declining pattern. Economic growth in the coming periods may be a little slower than in previous eras and thus, the appropriate interest rates for the Canadian economy may consequently be lower than in previous eras.

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