Bank of Canada’s interest rate announcement hinged on turbulence

The Bank of Canada decided not to increase the interest rate yesterday amid slower-than-expected GDP growth caused, in part, by a cooled housing market and nebulous NAFTA negotiations.

“We were expecting the real estate market to soften after the changes in January, and real estate plays a large part in Canada’s GDP,” said Dalia Barsoum, president and principal broker of Streetwise Mortgages. “So I’m not surprised they didn’t increase the rate because growth in the first quarter wasn’t there. Growth was below expectationd primarily because of the softening real estate market.”

The GDP only grew 1.3% through Q1—falling well short of the 2.5% prediction—impelling the Bank of Canada to keep the interest rate still at 1.25%.

The at-times acrimonious negotiations to reconfigure the North American Free Trade Agreement also appear to have influenced the Bank of Canada’s Wednesday decision.

Spring is usually the real estate market’s most frenzied season of the year, but even a rebounded market through Q2 likely won’t be enough to catalyze enough GDP growth for a rate increase.

“Other factors are at play—we’ve got exports, what’s going on in with the trade negotiations, and how inflation is looking, so we may see activity on the real estate side in Q2, but there is a lot of uncertainty around trade at the moment, and in my view, it will depend on how that looks,” said Barsoum.

“A big component of our GDP is exports, and our biggest relationship is with the U.S. when it comes to exports and imports, and if NAFTA doesn’t go well these things will be impacted. Right now NAFTA is on life support. If it’s revived then it will go well, otherwise we’ll still be in a shaky boat on that end.”

But that doesn’t mean the interest rate will not be hiked between now and year’s end. While the situation is touch and go, Barsoum expects the rate hike to occur during the third quarter of 2018.

“I think by the end of the year there will be one more rate increase, probably in the third quarter, but at this point Q1 looks rougher than what was expected initially. “

McKay Wood, a mortgage broker with Verico Mortgage Pal, is glad the Bank of Canada didn’t hike the interest rate.

“I was hoping that it wouldn’t go up because I’m in the variable camp myself,” he said. “I thought that we’d still have stability. I didn’t want it to go up, but even if it did go up, the trend is trickling upwards, so if it came this time or next time, or the next, it will come. I was delighted that I didn’t have to get bombarded by calls from clients.”