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, as was universally expected.
The Bank also issued its latest policy statement, which is basically an assessment of how events both at home and abroad are influencing its monetary-policy direction. Here are the highlights from the BoC’s latest policy statement, with my accompanying comments:
- Overall global economic growth is evolving as the BoC anticipated in its October Monetary Policy Report (MPR). The U.S. economy “continues to grow at a solid pace”, and while the Bank noted that “private domestic demand has proven slightly less robust than expected”, I don’t think this is too concerning because Americans are saving more instead of spending these days. To wit, the U.S. personal saving rate rose steadily from 4.80% in May of this year to 5.60% by October, which is the highest it has been in nearly three years.
- The Bank notes that “ongoing terms-of-trade adjustments and shifting growth prospects across different regions are contributing to exchange rates movements”, and that against this backdrop “policy divergence is expected to remain a prominent theme”. In other words, countries are experiencing very different economic growth trajectories, which are leading to exchange-rate swings and are impacting the relative demand for imports and exports. These diverging economic circumstances require the central banks to undertake very different monetary-policy actions, and the BoC calls this a “prominent theme” that will continue to have a significant impact on global economic growth going forward.
- In Canada, our economy “continues to undergo a complex and lengthy adjustment to the decline in Canada’s terms of trade”, with sharply lower commodity prices being the primary culprit. This adjustment “is being aided by the ongoing U.S. recovery, a lower Canadian dollar, and the Bank’s monetary easing this year”. Our overall merchandise trade deficit widened from $2.3 billion in September to $2.8 billion in October, but we are starting to see some encouraging signs. For example, while our overall export volumes are down 1.5% so far this year, this shortfall is essentially an energy story, with non-energy exports actually up 9.7% over the same period. Also, while our exports to the U.S. fell by 2.8% in October, a look over a slightly longer time horizon shows that we enjoyed a $9.7 billion trade surplus with the U.S. in the third quarter, which is the highest it has been in a year, and that is despite a big drop off in our energy exports to U.S. markets. So while our overall economic data aren’t ringing any bells at the moment, there are some encouraging signs that the cheaper Loonie is starting to give our economy some traction outside of the energy sector.
- Our economy’s struggle to adapt to sharply lower commodity prices were still the dominant economic theme in the BoC’s latest statement. The Bank noted that our resources sector continues to grapple with lower prices and that this is weighing down resource-sector spending, and more broadly, overall business investment. The BoC also noted that while “the labour market has been resilient at the national level”, there have been “significant job losses in resource-producing regions”.
- The BoC is cautioning that our GDP growth will “moderate in the fourth quarter of 2015 before moving to a rate above potential in 2016.” In other words, the Bank thinks that we will need one more quarter’s worth of adjustment before the early signs of positive momentum, which it is seeing now, will lead us to above potential growth next year. As always, predicting the specific timing of our recovery has made fools of all who have tried thus far, but the Bank is clearly optimistic about how 2016 is shaping up. That is consistent with the forecasts it provided in its most recent MPR.
- Overall inflation, as measured by the Consumer Price Index, “remains near the bottom of the Bank’s target range [at about 1%], owing to declines in consumer energy prices”. Meanwhile, core inflation “is close to 2% as the effects of the lower dollar and the output gap continue to offset each other”. (As a reminder, the output gap is the difference between our actual output and our maximum potential output. Interest rates would normally be expected to rise at or about the time when the output gap closes.) Core inflation has actually been slightly above the Bank’s 2% target for each of the past twelve months, and while the output gap has been keeping labour costs in check, that is starting to change. For example, last Friday’s employment report for October showed that our average hourly earnings spiked by 0.6% in October and have now risen 3.4% over the most recent twelve months. If this trend continues, overall inflation should begin to rise. The Bank will then have to reconcile the prospect of above-target inflation with the rising “vulnerabilities in the household sector” with its desire to maintain accommodative monetary policy.
Five-year Government of Canada bond yields rose by one basis point last week, closing at 0.92% on Friday. Five-year fixed- rate mortgages are available in the 2.54% to 2.69% range and five-year pre-approval rates are offered at 2.79%.
Five-year variable-rate mortgages are available in the prime minus 0.50% to prime minus 0.40% range, which translates into rates of 2.20% to 2.30% using today’s prime rate of 2.70%.
The Bottom Line: Overall, I thought this was essentially a neutral policy statement by the BoC. The Bank remains concerned about how our overall economy is adjusting to lower commodity prices, most specifically oil, but it is also encouraged by early signs that the lower Loonie is helping to stimulate our exchange-rate sensitive sectors. While last Friday’s strong U.S. nonfarm payroll report makes it a virtual certainly that the U.S. Federal Reserve will raise its policy rate when it meets next week, I still believe that the BoC will keep our policy rate where it is 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
December 7, 2015
Mortgage |