Global pressures might compel BoC to keep rates flat yet again

by Ephraim Vecina20 Sep 2019

Amid a wide variety of pressures from around the world, the Bank of Canada is more likely to keep rates as they are next month, according to Sherry Cooper of Dominion Lending Centres.

Cooper’s analysis earlier this week came as the Canadian Real Estate Association released its latest numbers.

Said figures indicated that national home sales increased for the sixth straight month in August, although still around 10% lower than the peaks achieved roughly two to three years ago.

“The run of robust housing data gives the Bank of Canada another reason — along with robust job gains, higher wage rates and stronger than expected output growth in Q2 — to hold interest rates steady, even as more than 30 central banks around the world have cut interest rates further,” Cooper wrote.

Earlier this month, the BoC kept the rate at 1.75% for the seventh straight meeting, stating that “the current degree of monetary policy stimulus remains appropriate.”

Among the external pressures influencing the Canadian housing market are the trade war, the US economy, and oil prices, which might see some significant fluctuations after last weekend’s attacks on a Saudi Arabian oil producer.

“The situation has been compounded with even more considerable uncertainty with the weekend bombing of the Saudi Aramco oil fields, taking an estimated half of all Saudi oil out of production,” Cooper stated.

The September 14 strikes led to global oil prices surging up by around 12% on Monday. Industry observers polled by Reuters warned that if Saudi Arabia does not recoup the lost supply, the Brent crude global benchmark (which was around $68/barrel at the time of the attacks) could end up as high as $100/barrel.

Fortunately, trade uncertainty south of the border is the only conceivable factor that could stall the Canadian recovery of the past few quarters, Cooper said.

“The flight to US Treasury bond safety has diminished, raising the US and Canadian government bond yields by roughly 25 basis points from extremely low levels. Canadian 5-year bond yields at 1.48% are at their highest level in two months,” she explained.

“In consequence, the spread between the best 5-year fixed mortgage rates and 5-year government bonds is at a very tight 77 basis points, which is likely not sustainable. A more normal spread between the two is 120-ish (or more) for the best rates and 150-plus-ish (for regular rates).”

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