Global trade uncertainty and lower-than-expected Canadian exports and business investments have prompted the Bank of Canada (BoC) to maintain the benchmark interest rate at 1.75% that has been the same since October, 2018.


What could be the reason?

The overnight interest rate, which is the rate that is used while lending money to consumer-facing lenders, like banks is adjusted to manage inflation. If the economy is doing fine, the BoC raises the rate so borrowing becomes more expensive and consumers are deterred from spending unnecessarily. When the economy goes for a toss, the interest rate is lowered accordingly so people get to spend more money and eventually contribute towards boosting the economy.

Consumer spending has seen a decline even though employment rates and labor income has gone up overall. Housing market is suffering too, with less people buying houses or refinancing existing mortgages. The economy is expanding at a slower rate than predicted, so the interest rate has been deliberately kept low. The forecast earlier this year was that growth would be at 1.7% for the Canadian economy, but it has been downgraded even further at 1.2%.


Are things optimistic?

Bank of Canada governor Stephen Poloz has stated that the second half of 2019 is likely to be much better as we progress towards the 3rd and 4th quarters. However, analysts predict that the pause on further hike rates is more than that – when the BoC does move again, it won’t be a hike but the first rate cut, which occurred way back in 2013. Economist David Rosenberg has said the steadily plummeting Canadian economy will make matters worse. Capital Economics mentioned in a research note published by the London-based research firm that the rate is likely to fall to 1.5% by the end of the year. Stephen Brown, who is the firm’s senior Canada economist, drew attention to the fact that the central bank’s Senior Deputy Governor, Carolyn Wilkins, and Deputy Governor, Timothy Lane, didn’t touch upon any rate hikes in their recent speeches.

Why has consumer spending taken a hit?

There is no specific answer as a lot of factors have influenced this trend:


Housing affordability has become tougher, especially in places like Toronto where the price to rent an apartment is increasing at an alarming rate. If 50% of more of the income is devoted towards housing, there isn’t much leftover to spend. Even for those who own a home, the housing market isn’t doing that well, so property values could be decreasing, while there is less home equity available for access. Moreover, the household debt of this country went up to a record $2.7 trillion in 2018, so a higher income might not be of much help to those struggling with debts.


Yes, employment rates have shown improvement, but the type of employment is also integral to the mix! Last year in August, the Huffington Post released a report that 1 out of 5 Canadian professionals are in unstable employment situations with temporary contract work, jobs with fluctuating hours, or at a place with zero job security.

What does the BoC pause indicate for you?

If you have accumulated high debt levels or are saddled with low credit rating, consolidate debts or look for ways to pay it off, while working on credit repair simultaneously. In case property values are going down, it is time to access home equity funding – you could get more now instead of later. For people with variable rate mortgage, the current rate diminishes the timing and likelihood of any increase to the prime rate. Even fixed rates are likely to remain stable for now! Those looking for personal financing, this is the perfect timing as you can get a lower interest rate from BoC.

Sometimes, a slow economy could be a good time to get finances in order due to the interest rates not being hiked. You should do something to improve your financial situation before the rates are increased once again.

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