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December 04, 2012

The BoC Rate Meeting: Nothing to See Here

Today’s Bank of Canada rate announcement was another yawner. No one expected rates to rise. Analysts merely wanted to see if the Bank would drop hints on its future rate-setting plans.
It did, but the new clues weren’t much different from its previous guidance.
For mortgage watchers, the long and short of it was this:

• the Bank maintained its rate tightening bias, but
• short-term mortgage rates (which the BoC controls) are unlikely to jump near-term.

The Bank’s outlook can largely be summarized in these snippets from today’s announcement:

• The global economy remains “vulnerable to major shocks from the U.S. or Europe.”
• In Canada, “…Underlying (economic) momentum appears slightly softer than previously anticipated…”
• Our economy has a “small degree of slack”
• “…The pace of economic growth is expected to pick up through 2013.”
• "Over time, some modest withdrawal of monetary policy stimulus will likely be required..."
• “It is too early…to determine whether the moderation in housing activity and credit growth will be sustained.”

That last sentence is noteworthy. The Bank carefully crafts every last syllable in its rate statements. In this case, it is clearly reinforcing recent warnings that rate hikes are possible if housing-driven debt growth doesn’t taper off.
That said, ‘possible’ and ‘likely’ are two different concepts. With inflation undershooting forecasts and with future price expectations “well-anchored” (the BoC’s words), it seems unlikely that debt accumulation will move interest rates—at least not before the spring housing market gets underway.
The 5-year government bond yield (which influences long-term mortgage rates) was little changed by the Bank’s decision.
The next BoC rate meeting is in 50 days on January 23, 2013. By that time, we’ll know how one major economic risk factor plays out, the U.S. Fiscal Cliff.

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Written by: Rob McLister, CMT