Dave Larock in Interest Rate Update, Mortgages and Finances
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The Bank of Canada (BoC) left its overnight rate unchanged last week, keeping the base rate on which our variable-rate mortgages are priced at 0.50%, as most market watchers were expecting.
The BoC also released its accompanying statement, and here are the highlights that I think are most relevant for anyone keeping an eye on Canadian mortgage rates (with my comments in italics):
- “[Overall] Consumer Price Index (CPI) inflation remains near the bottom of the target range … [and] core inflation has been close to 2 per cent, with disinflationary pressures from economic slack being offset by transitory effects of the past depreciation of the Canadian dollar and some sector-specific factors.” In other words, the largest source of downward pressure on our core inflation rate (which strips out more volatile CPI inputs like food and energy) is overall slack in our economy, while the cheaper Loonie and “some sector-specific factors” are our largest sources of upward inflationary pressure. Given that, I think that the BoC is more concerned about disinflation than inflation over the longer term, because overall economic slack will take longer to improve than the “transitory” pressures that are counterbalancing that negative momentum for the time being.
- “The dynamics of GDP growth in Canada outlined in July’s MPR [Monetary Policy Report] also remain intact. The stimulative effects of previous monetary policy actions are working their way through the Canadian economy.” In other words, the BoC is optimistic that our GDP growth will turn positive in the third quarter, after being mildly negative in the first two quarters of this year (when we experienced a mild, technical recession). In a recent note to subscribers, David Rosenberg wrote that recent Canadian economic data imply third-quarter Canadian GDP growth of as much as 3%, which would be an impressive turnaround. The BoC is also expressing confidence that its monetary policy actions are “working their way through the economy”. I agree with this view, but it is interesting to note that our economy’s biggest lift has come from the cheaper Loonie. Despite the fact that the Loonie fell as a direct result of the BoC’s most recent rate cuts, BoC Governor Poloz has repeatedly, and incredulously in my view, said that the BoC does not use its monetary policy to influence the Loonie’s exchange-rate value.
- “Canada’s resource sector continues to adjust to lower prices for oil and other commodities, with some spillover to the rest of the economy. These adjustments are complex and are expected to take considerable time.” If the BoC thinks that our critically important resource sector will take “considerable time” to adjust to sharply lower oil prices, then it is likely to remain cautious about tightening monetary policy for as long as these adjustments are still taking place.
- “Economic activity continues to be underpinned by solid household spending and a firm recovery in the United States, with particular strength in the sectors of the U.S. economy that are important for Canadian exports.” Here, the BoC cites “solid household spending” but makes no mention of the rising household debt levels that accompany this spending. Given that the Bank has highlighted the risks of rising household debt levels many times previously, this is a significant omission. The BoC also credits “strength in the sectors of the U.S. economy that are important for Canadian exports”, which have no doubt been buoyed by the cheaper Loonie. But again, I guess we are supposed to believe that’s just a happy coincidence because, as per above, the BoC doesn’t use its monetary policy to influence the Loonie. (I’m not sure how BoC Governor Poloz can even say that with a straight face.)
- The BoC cited concerns “about growth prospects for China and other emerging-market economies” and how this will impact the pace of the global recovery. Thankfully, “movements in the Canadian dollar are helping to absorb some of the impact of lower commodity prices and are facilitating the adjustments taking place in Canada’s economy”. Furthermore, “the latest data confirm that exchange-rate-sensitive exports are regaining momentum”. Once again, the BoC credits the cheaper Loonie for giving our economy much-needed shock absorption and a powerful stimulus. And even though this depreciation was a direct result of the BoC’s rate cuts, the BoC never considered that its monetary policy might have this effect (and if you believe that, I have some swamp land in Florida to sell you …)
I think the BoC’s latest statement essentially confirms its cautious overall monetary policy approach. While our third-quarter data have been encouraging, our economy must overcome powerful headwinds at home and abroad that will take time to dissipate. Against this backdrop, I don’t think that the BoC is any more inclined to drop its overnight rate, and risk exacerbating concerns over rising household debt levels (which appear to have abated of late), than it is to raise its overnight rate, and risk trampling the green shoots of our renewed economic recovery, which are evident in the latest economic data.
Five-year Government of Canada bond yields rose by two basis points last week, closing at 0.75% on Friday. Five-year fixed-rate mortgages are offered in the 2.49% to 2.59% range and five-year fixed-rate pre-approvals are available at rates as low as 2.64%.
Five-year variable-rate mortgages are available in the prime minus 0.65% to prime minus 0.75% range, depending on the size of your mortgage and the terms and conditions that are important to you.
The Bottom Line: The BoC’s latest statement confirms that it is maintaining a cautious approach to monetary policy in the current environment. The headwinds from both home and abroad that are fuelling that caution should take some time to abate, and their magnitude bolsters my view that both our fixed and variable mortgage rates should stay at or near their current levels for the foreseeable future.
David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog, Move Smartly, and on his own blog: integratedmortgageplanners.com/blog Email Dave
September 14, 2015
Mortgage |