This week is sure to be a nail-biter for many Canadians and Americans watching whether central banks in both countries will hold their current interest rates in place.
On July 30, both the Bank of Canada and the United States Federal Reserve will announce the status of the benchmark or overnight interest rate. This is the floor that most commercial banks and other lenders use to build their own interest rates, or prime rates for customers and clients.
Interest rates set by the central banks are a crucial factor in shaping how much consumers pay for things like auto loans and mortgage rates, and the pending decision by both banks on Wednesday comes amid a broader cost-of-living crunch for consumers.
But experts believe the chances of a rate cut happening are slim — especially given the current trade war.
Based on the current and future state of the economy and labour market, most experts believe the Bank of Canada will make no changes to interest rates on Wednesday, although nothing is guaranteed at this point.
With mortgages, for example, a bank like TD or CIBC bases its prime mortgage rate off of the overnight criteria set by the Bank of Canada, which is currently 2.75 per cent, and as of publication, virtually all of the big Canadian commercial banks have a prime rate of 4.95 per cent.
Those who are looking to apply for a mortgage very soon, or currently have a variable rate mortgage, are likely paying very close attention for an update. If the Bank of Canada changes its lending policy, then their expected costs will likely change as well.
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This means that if a client of a commercial bank applies for a mortgage, their interest rate on that loan could be as low as 4.95 per cent. But, if the Bank of Canada changes its overnight benchmark, then commercial banks will usually change theirs for clients as well.
If someone has a variable rate mortgage, it changes based mainly on these fluctuations by the Bank of Canada.
In order to tame multi-year inflation highs in 2022, the central bank raised interest rates. One of its key methods as part of its mandate to maintain economic stability. The Bank of Canada did this gradually over the course of several months to a peak of five per cent.
Once economic data showed inflation was falling within its target range, the Bank of Canada began lowering its interest rate to a “neutral” level — meaning the rate is high enough to keep prices stable, while also low enough to allow for economic growth.
The last time interest rates were cut was in March from three per cent to 2.75 per cent and it has stayed the same since.
Part of this rate-hold period has to do with economic data the central bank uses to make an informed decision, including monthly updates on consumer inflation (CPI), overall economic growth (GDP), as well as employment data and surveys of sentiments from both consumers and businesses.
However, on several occasions since, the Bank of Canada said its decisions would be “less forward looking” due to several “layers of uncertainty” surrounding the trade war.
“The effects of trade wars on supply chains may remain at a nascent stage of forcing companies to preserve higher than normal inventories, build them further, and bring chains closer and tighter together away from production markets with higher border risks,” says Derek Holt, vice-president and head of Capital Markets Economics at the Bank of Nova Scotia.
“All of that means higher costs, borne by consumers and other businesses. The lagging effects of the Canadian dollar’s depreciation over recent years may be another incremental factor, so might competition and concentration in some sectors that have pricing power.”
Holt cites other factors that could contribute to the central bank’s decision to continue to hold rates.
This includes recent reports showing Canada’s seemingly strong job market, as well as the federal government working towards a major budget in early fall, as additional reasons the Bank of Canada may continue to take a wait-and-see approach.
South of the border, the U.S. central bank, the Federal Reserve, will also be setting monetary policy, and although the Fed and the Bank of Canada operate separately and serve two different economies, there are some similar sentiments in their current approach.
Holt describes how current economic data in the U.S., including that of the CPI report on inflation, GDP, as well as recent reports on the job market “have remained resilient.”
“No change (is expected) at this (Wednesday’s) meeting. Two key issues will keep the FOMC (Federal Reserve) on hold,” says Holt.
“One is that the Fed is data dependent and recent data has not supported easier monetary policy up to this point. Second is that the debate over how trade, fiscal, immigration and regulatory policies may affect the Fed’s dual mandate going forward in future date remains open.”
On Wednesday, the Bank of Canada’s monetary policy announcement is scheduled for 9:45 a.m. EDT, with a press conference shortly after at 10:30 a.m. EDT.
At 2 p.m. EDT on Wednesday, the Federal Reserve will do the same, with a speech followed by a media question period at 2:30 p.m. EDT.
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