Last week’s Bank of Canada (BOC) rate announcement was a stunning departure from the Bank’s long held position that rates had nowhere to go but up. Since Stephen Poloz took over as BOC Governor he’s been steadily moving away from his predecessor’s position that a rate hike was imminent, but this recent announcement took many by surprise.
Official Bank of Canada announcements are carefully drafted with subtle wording to prepare the market and avoid surprises. While the Bank’s previous announcement moved away from upward pressure, last week’s announcement took the bold step of highlighting the downward pressure. The notable sentence is “The risks associated with elevated household imbalances have not materially changed, while the downside risks to inflation appear to be greater”. The best tool the Bank of Canada has to combat low inflation is to reduce the overnight lending rate which in turn lowers the prime rate of interest.
While this announcement in no way commits to a rate decrease it opens the door for the first time in more than 3 years. What this announcement does do quite clearly is to remove the threat of an interest rate increase for the foreseeable future.