What would it take for Canadian interest rates to drop in 2019?

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Like many other market observers, Central 1 expects the Bank of Canada will hike its influential key interest rate this year — but the credit union also presents a possible scenario that could see rates sink lower.

“The next Bank rate move is expected to be a quarter-point increase in late October 2019 on the expectation that oil prices have stabilized at a higher level, U.S.–China trade tensions have eased and global growth has stabilized,” reads the latest Central 1 Interest Rate Forecast.

However, Central 1 notes that there are downside risks. “A worse-case scenario — where U.S.–China tensions escalate or U.S. policies cause more disruptions and its political situation worsens — would bring a rate cut scenario into play,” the report continues.

Since July 2017, Canada’s central bank has increased its mortgage-market influencing key rate, also known as the overnight rate,, five times. The most recent hike was October, when a 25-basis-point increase brought the overnight rate to 1.75 percent.

Central 1’s commentary, published late last week, followed the release of a separate report in which Capital Economics predicted a rate cut was in the cards this year.

Like Central 1, Capital Economics is in part basing its call on oil prices. But where Central 1 suggests recovery is most likely, Capital Economics says policymakers are underestimating the extent to which the economy is being negatively impacted.

That said, Central 1 says softening mortgage demand and slowing home sales may encourage some lenders to incent consumers with lower mortgage rates or other conditions. “Conditions for a mortgage rate cut are forming,” Central 1 says.

Josh Sherman

Josh Sherman

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