The Bank of Canada left its overnight rate unchanged at 1 per cent for the 13th consecutive meeting. In the statement accompanying the decision the Bank noted that economic momentum in Canada is slightly firmer than the Bank had forecast in January and that economic headwinds from the US and Europe have abated somewhat. However, the Bank still judges the continued accumulation of debt by Canadian households to be the biggest domestic risk facing the economy. The Bank further noted that the degree of economic slack has been smaller than anticipated in January and that the economy is now expected to return to full capacity in the first half of 2013. Given a more rapid return to full capacity, we may see rate increases sooner than the mid-2013 date that most economists have penciled in. Indeed, the Bank sounded a more hawkish note in concluding their statement on the interest rate decision, citing that a modest withdrawal of monetary stimulus may become appropriate given firmer underlying inflation. However, the Bank was careful to condition that any withdrawal of stimulus would need to be balanced against domestic and global economic developments.

Our bias, and our modeling, still point to rates remaining at 1 per cent until the first quarter of 2013. However expectations of an increasingly hawkish Bank of Canada may start to get priced into long-term interest rates which could push mortgage rates higher in coming months.

Copyright British Columbia Real Estate Association. Reprinted with permission.