Six factors in the Bank of Canada’s decision to leave interest rates unchanged

Theglobeandmail.com
Jan. 20, 2016
By Ian Mcgugan

Economy

“Growth likely stalled in the fourth quarter,” the Bank of Canada acknowledged. It expects better things ahead, but not everyone is so confident. David Madani of Capital Economics called the bank’s latest growth forecasts “woefully optimistic.”

Loonie

Cutting rates would have pulled the already battered loonie even lower, making imported goods more expensive and boosting inflation. “One of the key factors that kept the BoC on hold was that the Canadian dollar had fallen too far, too fast,” Bank of America Merrill Lynch wrote.

Overnight rate

The bank surprised markets a year ago by abruptly lowering its main policy tool, the overnight rate, to help stimulate a slowing economy. But the rate, which is used to help set a host of other lending rates, is now so low that the bank has little ammunition left and may be reluctant to use it.

Debt-to-GDP

The bank would like to wait and see what the federal government does. If the Liberals open Ottawa’s wallet, they could boost the economy and remove the need for lower rates. The government’s debt burden has tumbled in recent years, so there is room for spending.

House prices

The bank has to keep in mind the potentially harmful effects of lower rates. Over the past few years, Canadian households have mired themselves in debt to buy ever more pricey homes and lower rates could encourage them to go even deeper in hock.

Unemployment

Canada’s jobs market remains less than robust, especially in Alberta, where layoffs in the oil patch have sent unemployment levels soaring. But it’s not clear that lower rates would address the fundamental issue of plummeting resource prices.