Up, down or sideways: What’s next for Canadian interest rates?

The Canadian economy is measured by the value of all goods and services produced and traded across the country, otherwise known as the Gross Domestic Product (GDP).

When GDP grows too quickly for too long, inflation increases. When GDP growth is too slow or turns down, inflation recedes.

The Bank of Canada’s mission is to keep inflation within the target range between 1% and 3% (with 2% being the bullseye). To do that, it adjusts its overnight lending rate–its key policy interest rate and the only interest rate over which it has direct control. It increases the overnight lending rate if it’s trying to cool GDP growth and inflation. Or vice versa (because lower interest rates spur economic growth and inflation).

The most recent GDP reading revealed the Canadian economy is braking sharply. Until recently, GDP growth was being driven by consumer spending and new home construction, both of which were hammered by successive rounds of mortgage regulation tightening (the most recent of which was the mortgage stress test for home purchases involving more than a 20% down payment). Although the Bank of Canada continues to predict a transition to GDP growth driven by business investment and exports, neither of them have been strong enough to take the driver’s seat.

The Bank of Canada is still hinting its next move will be to hike interest rates, with economic data determining the timing. Key factors being tracked by the Bank include household spending, oil prices and global trade policy. The Bank publishes its next Canadian economic forecast on April 24, 2019 and it will be closely scrutinized for new hints about whether it will raise interest rates, lower them or keep them on hold.

Meanwhile, and by contrast, economists and financial markets are increasingly betting the Bank of Canada’s next move will be to cut, not raise, interest rates before the end of the year.