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The Bank of Canada held its benchmark overnight lending rate steady at three per cent at it's setting on September 3rd. The trend-setting Bank rate, which is set 0.25 percentage points above the overnight lending rate, remains at 3.25 per cent.

The Bank's decision to hold interest rates steady aims to support Canadian economic growth. Financial markets widely expected the Bank rate to be put on hold due a dimming outlook for Canadian economic growth and recent remarks by the Bank that inflation will peak below what it anticipated in its July Monetary Policy Report.

"Slowing global economic growth is dampening demand and prices for energy and other commodities, " said CREA Chief Economist Gregory Klump. "A lower peak in inflation gives the Bank more time to let previous interest rate cuts support economic growth." To stabilize credit markets in the aftermath of the U.S. sub-prime mortgage market meltdown, the Bank cut the overnight lending rate by 1.5 percentage points from December 2007 to April 2008.

The Bank acknowledged, "[Canadian] domestic demand has slowed modestly but remains strong." It highlighted that the Canadian economy "continues to be supported by financial conditions that remain significantly better than those in most other major economies and by income gains stemming from past improvements in the terms of trade."

In its July Monetary Policy Report, the Bank revised its forecast for economic growth downward. Remarks in its September announcement to hold interest rates steady suggest that it will again trim its outlook for economic growth and inflation in its next Monetary Policy Report to be published in October.

When the Bank left interest rates unchanged on September 3rd, the advertised five-year conventional mortgage rate stood at 6.85 per cent. This is unchanged from where it stood a year ago, and three-tenths of a percentage point below where it stood when the Bank made its previous interest rate announcement on July 15th. Competition among mortgage lenders remains stiff, but discounts off advertised mortgage interest rates remain small. This is due to the U.S. subprime mortgage meltdown and resulting global credit crunch, which continue to keep banks' cost of funds elevated.

"National resale housing sales activity continues to decline from its peak last year, and new listings are rising," said Klump. "Increased home prices and changes to mortgage default insurance that take effect later this year will continue undermining affordability at the margin." (CREA 03/09/2008)