Economists predict Bank of Canada will stay on hold until July 2013

By Alexandra Posadzki, The Canadian Press

The Bank of Montreal predicted Tuesday that the Bank of Canada will keep its key interest rate low for longer than it expected.

Economists at the bank are now predicting that the central bank will not raise its key rate until July 2013, six months later than their earlier prediction of January 2013.

The rate affects the prime lending rates at banks and in turn influences all kinds of interest rates including those charged to variable rate mortgages and lines of credit.

But BMO mortgage expert Laura Parsons urged prospective home buyers to choose fixed-rate mortgages, which are also near record lows.

“While interest rates have been at historic lows, the inevitable climb will happen,” said Parsons. “Choosing a fixed mortgage can provide protection against rising rates and make the cost of owning a home more manageable in the long run.”

Senior economist Michael Gregory said the change in outlook stems from the easing policy of the U.S. Federal Reserve, a downgraded Canadian economic outlook and tightened mortgage rules.

“The weaker U.S. economy, which is causing the Fed to ease in the first place, does ripple across the border and directly impacts Canada, through trade channels and things like that,” said Gregory.

Ottawa moved last month to tighten mortgage rules for the fourth time in as many years in an effort to cool the housing market.

The changes, which come into effect on July 9, include a cut to the maximum amortization period for government insured mortgages cut to 25 years from 30.

Bank of Canada governor Mark Carney has called household debt one of the biggest threats to the Canadian economy.

The new rules should stem some fears around growing household debt that would otherwise push the Bank of Canada to increase rates sooner.

“The tightening of the government’s mortgage insurance rules does serve to act like higher interest rates specifically for that sector,” Gregory said. “So that takes some of the urgency away from the Bank of Canada to adjust rates any time soon.”

The Bank of Canada has kept its key interest rate at one per cent since September 2010.

Gregory said he expects that the Bank of Canada will change its projections for economic growth when it releases its new monetary policy report on July 18.

In its last policy report in April, the central bank predicted 2.4 per cent annual growth to the Canadian economy this year and next.

“I suspect [the policy report] will show softer growth in Canada, partly because of global factors and in part because of what’s going on in the U.S.,” said Gregory.

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