Bank Holds Interest Rates Steady

The Bank of Canada held its benchmark overnight lending rate steady at three per cent on June 10th. The trend-setting Bank rate, which is set 0.25 percentage points above the overnight lending rate, remains at 3.25 per cent.
The Bank’s decision to hold interest rates steady was aimed at fighting inflation. Financial markets widely expected the Bank rate to be cut a further one-quarter of a percentage point, while hedging bets due to soaring food and energy prices.
“The Bank wants to prevent inflation expectations from getting away,“ said CREA Chief Economist Gregory Klump. “Interest rates will be on hold over the summer, giving the Bank time to judge the effect of previous interest rate cuts.” To stabilize credit markets in the aftermath of the U.S. subprime mortgage market meltdown, the Bank cut the overnight lending rate by one and a half percentage points from December 2007 to April 2008.
The Bank recognized that the U.S. economic slowdown was pummeling Canadian manufacturing exporters, but tempered its concerns: “Although the composition of U.S. growth has not been favourable for demand for Canadian goods and services, overall, global growth has been stronger and commodity prices have been sharply higher than expected.”
The Bank also hinted it may lower the bar it sets for potential economic growth, saying “the risk remains that potential growth will be weaker than assumed.” Lowering its estimate for potential growth may prompt the Bank to raise interest rates to keep inflation contained.
When the Bank lowered interest rates on June 10th, the advertised five-year conventional mortgage rate stood at 6.65 per cent. This is just under one half of a percentage point below where it stood a year ago. Competition among mortgage lenders remains stiff, but discounts off advertised mortgage interest rates have shrunk because the U.S. subprime mortgage meltdown and resulting global credit crunch have raised banks’ cost of funds.
“National sales activity will be down from last year’s record due to rising prices,” said Klump. “Interest rates have bottomed out, so homebuyers going with a variable rate mortgage would be well advised to get pre-approved now before interest rates climb.” (CREA 10/06/2008)
Created: 06/10/2008