Bank of Canada maintains the status quo...

As anticipated, the Bank of Canada opted to hold the Bank's target rate at 1 per cent this morning. On inflation, the Bank noted that, "...inflation is expected to remain above 3 per cent in the near term, largely reflecting temporary factors such as significantly higher food and energy prices." However, the Bank expects total CPI inflation to return to 2 per cent by the middle of 2012 as excess capacity in the economy is absorbed. The Bank pared back it's growth forecast for 2011 and 2012 slightly to 2.8 and 2.6 per cent respectively, mirroring BCREA's own national economic forecast for the next two years.

In reference to heightened uncertainty in the global economy due to ongoing debt concerns in Europe and the current wrangling over the US debt-celing, the Bank noted that "widespread concerns over sovereign debt have increased risk aversion and volatility in financial markets." This uncertainty, along with a weaker outlook for US economic growth, will likley push the Bank's next rate increase to September, but possibly to October. In light of a weaker global economy and increased uncertainty, we have pared back our expectations of Bank of Canada rate hikes to between 1.5 and 1.75 per cent by the end of 2011 with risk tilted to the downside. This means a continuation of very borrowing costs on variable rate products over the summer and into the fall which should help support housing markets this year.