Bank of Canada Interest Rate Announcement - January 21, 2014

The Bank of Canada announced this morning that it is maintaining its target for the overnight rate at 1 per cent.  In its statement, the Bank once again highlighted that inflation remains stubbornly below the Bank's 2 per cent target due to significant excess supply in the Canadian economy, as well as heightened competition in the retail sector.  The Bank now see inflation returning to target in about 2 years as the effects of retail competition dissipate and excess capacity is absorbed through faster economic growth. In its concluding paragraph, the Bank notes that although the fundamental drivers of inflation appear to be strengthening, inflation remains below target and downside risk to inflation have grown in importance. Most importantly, the Bank notes that the timing and direction of the next change in interest rates will depend on how new information influences the balance of risk between low inflation and elevated household imbalances.

There has been substantial speculation of late that if inflation remains near the bottom of the Bank of Canada’s 1-3 per cent control range over the next six months, then the next move by the Bank will be a rate cut rather than the rate-hike most economists have penciled into forecasts.  Indeed, the Bank’s messaging and guidance has been much more dovish of late, essentially reversing the unequivocal tightening bias at the Bank under Mark Carney.  The macroeconomic impact of the change in messaging is significant, prompting both a decline in long-term interest rates as well as a substantial decline in the dollar.  A result that is both welcome to a slow-growing Canadian economy as well as very likely engineered by policymakers. While we are not in the rate-cut camp (though that outcome is far more likely that it was six months ago), particularly with economic growth in the global economy set to dramatically improve, we believe that an eventual rate tightening is still far out on the horizon. 

Canadian Housing Starts - January 9, 2014

Canadian housing starts declined in December from 197,797 units at a seasonally adjusted annual rate (SAAR) to 189,672 units SAAR. A decline of 4.2 per cent.  The trend in Canadian new home construction also declined slightly to 195,760 units SAAR over the past six months, a rate that is slightly higher than demographic demand suggests is needed.  For all of 2013, Canadian housing starts in urban centres were down 12 per cent compared to 2012.

New home construction in BC urban centres increased 14.5 per cent in December to 30,886 units SAAR. A ramp-up in new home construction to end the year pushed total starts for 2013 higher by 1 per cent compared with 2012 at 25,685 units. Single family units finished the year up 8 per cent while multiple unit starts declined 2 per cent. 

Looking at census metropolitan areas (CMA) in BC, total starts in the Vancouver CMA jumped 47 per cent year-over-year in December to finish 2013 at 18,696 units, a decline of 1 per cent over last year.  In the Victoria CMA, total starts were nearly quadruple that of December 2012 and finished the year down 1 per cent at 1,685 units. New home construction in the Kelowna CMA were up 59 per cent in December and posted 1,013 total starts in 2013, the first time since the 2008/09 recession that Kelowna new home construction has cleared the 1000 start threshold.   Housing starts also posted large gains in the Abbotsford-Mission CMA in December. New home construction doubled in that area in 2013 at 749 total starts.