Central Bank Not Budging on 1.75% Key Interest Rate

While the Bank of Canada (BoC) fully assesses the full brunt of its most recent policy decisions and far lower oil prices, they explained on Wednesday their plan of maintaining the benchmark interest rate. The target for the overnight key interest rate has been 1.75% since it was elevated to such heights in October—an occurrence that’s taken place five times since the summer of 2017.

Rates afforded to Canadian consumers by retail banks are adversely affected by the central bank’s key interest rate. Higher rates mean an increased cost of borrowing, which is actually ideal for savers.

A poll done by Bloomberg displays an absence of economists projecting an increase at this stage in the game. However, there are many parties curious to the bank’s stance on the oil cost as it plummets.  

Western Canadian Select has, at points, sunk to $14 US per barrel since the bank’s most recent meeting. Meanwhile, our neighbours south of the border never say U.S. blends ever get below $50. There’s plenty of reason for monetary policy to change and adapt if these prices don’t really budge causing a rift in the overall economy.

Production has been drastically decreased as an emergency measure by the Alberta government in an effort to add a jolt to prices.

The bank notes that due to production slowdowns, Canada’s energy sector will be less materially robust than anticipated.

According to Scotiabank economist Derek Holt, Alberta’s production setbacks are bound to be a catalyst a GDP hit.

In an attempt to re-examine rate policy, the BoC is set to meet come the new year.

While experts such as Bank of Montreal economist Benjamin Reitzes don’t believe we’re guaranteed to see a hike, overnight index swap activity means there’s a 50% chance of a rate hike.

Reitzes thinks for the BoC to decide on a hike, will take some coercing. There needs to be proof that oil prices can hang in there. As such, TD Bank analyst Brian DePratto sees the most likely time for a rate hike to be in Spring 2019 so that its narrative of growth can be re-established.  

Currency investors also comprise the contingent of those no longer expecting rate hikes in the onset of the new year. Having taken a half-cent hit after the decision came out, the Canadian dollars is less than 75 cents US. It hadn’t sunk to these depths since May 2017.

Still, a rate hike will increase the national dollar as it makes Canadian currency-denominated assets more valuable.

It will certainly be interesting to see how the BoC responds come 2019.