Why interest rates aren't going up... yet

A large red percentage sign sits on a roller coaster symbolizing the ups and downs of interest rate directions. (Getty Images)

Even though there’s a good chance the U.S. Federal Reserve will cut rates again on Wednesday, economists don’t expect Canada’s central bank to follow.

The consensus is for the Bank of Canada to keep its key overnight rate at 1.75 per cent, where it’s been since last October.

That’s music to the C.D. Howe Institute’s Monetary Policy Council’s (MPC) ears as most of its members recommend the Bank of Canada should hold.

Nine of the eleven members in attendance agree the current rate is appropriate, while 2 called for a cut to 1.50 per cent.

The MPC’s suggestion to hold steady for now, but eventually cut rates signals it’s comfortable with current conditions, but sees storm clouds on the horizon that will warrant easing eventually.

“The group noted that growth in domestic activity is moderate by historical standards, but that weak business investment and productivity growth mean that the Canadian economy’s productive potential is also likely growing relatively slowly,” said the C.D. Howe Institute in its report.

“While the labour market is strong and some indicators of wage growth have moved higher, inflation expectations remain subdued. CPI inflation is close to the 2 per cent target, and several members remarked that, with the overnight rate below the inflation rate – negative in real terms – and continued concerns about the housing market and household debt, there is no convincing case for more monetary stimulus at the moment.”

The website Finder also polled economists and arrived at a similar conclusion — that no move is the best move right now.

“The economy continues to show surprising resilience. The labour market in particular remains quite strong. Together with the radio silence from the Bank of Canada during the election cycle, holding steady makes the most sense,” said Brian DePratto, senior economist at TD Economics, in the report on Finder.

Real estate reality check

None of the economists expect housing affordability to get better, something that’s often top of mind for Bank of Canada Governor Stephen Poloz.

“Mortgage rates have declined from earlier in the year, labour markets remain strong, wages are growing faster than inflation, and we have seen a marked pick-up in residential real estate markets across Canada,” said Brett House, deputy chief economist at Bank of Nova Scotia.

“Inventory metrics remain at or near 20-year lows in the Toronto and Vancouver markets. There is still a fundamental shortfall in supply compared with demand in Canada’s three largest cities as immigration and population growth are set to remain high.”

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.

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