Bank of Canada holds interest rate steady amidst heavy household debt, mediocre economic forecast
With Canada’s household debt to GDP ratio the highest among developed nations, and a federal government promising to backstop more lending to first-time home buyers, Bank of Canada Governor Stephen Poloz held the overnight rate at 1.75 per cent.
Canada experienced a measly GDP growth of 0.1 per cent in the final quarter of 2018 while this year’s federal budget booked another $20 billion in borrowing to fund infrastructure projects and increased services. The national debt is in excess of $750 billion and adding up provincial and territorial debt that figure is nearly double.
The Bank forecasts a disappointing real GDP growth of 1.2 per cent this year (1.7 is considered benchmark), to 2.1 per cent next year and 2.0 per cent for 2021.
Poloz outlined four concerns of the central bank’s Governing Council; stress in the oil sector, international trade disruption, significant household debt and cuts to the provincial budget in Ontario “sufficient to more than offset all” GDP gains in British Columbia and Québec.
Eight times a year the Bank of Canada sets a target for the overnight rate, the one-day rate at which major financial institutions borrow and lend short-term funds among themselves.
These changes can influence other interest rates, such as consumer loans and mortgages as well as affect the exchange rate of the Canadian dollar.
Today the exchange rate is hovering around $1.25 Canadian-$1USD.