Dave Larock in Interest Rate Update, Mortgages and Finances
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If you were to give Bank of Canada (BoC) Governor Poloz a heavy dose of truth serum, he would readily admit that the Loonie is our policy maker’s best tool for stimulating the right kind of economic growth for our country.
Consider that the BoC has repeatedly said that any sustainable Canadian economic recovery must be underpinned by a rise in export demand that fuels increased business investment in productivity enhancements and expansion. What better way to stimulate our export manufacturers than to help nudge the Loonie lower with some dovish comments at just the right time?
Put another way, why drop the overnight rate further and make borrowing cheaper for everyone, including consumers who have already borrowed to record levels, if you can talk the Loonie down instead, and in so doing, create an economic tailwind that specifically benefits the very part of the economy, export manufacturing, that is so important to our country’s long-term success? When you compare it to the radical forms of quantitative easing (QE) that many of the developed world’s other central banks have resorted to in order to stimulate their economies, talking down your currency seems a lot less risky.
Interestingly, BoC Governor Poloz adamantly denies using monetary policy, or the Bank’s rhetoric, to influence the Loonie’s value – and he manages to keep a straight face while he does so. He argues that market forces should determine exchange rates, and we’re supposed to believe that it’s just a happy coincidence that the BoC’s rate cuts in 2015 helped push the Loonie from 83 cents U.S. down to 69 cents when our economy was being broadsided by plunging oil prices.
The Bank’s justification for dropping its policy rate at the time was that it needed to provide monetary-policy stimulus to offset the oil-price shock. No argument there. But the Bank wanted us to believe that it was trying to inspire businesses, which had already been enjoying rock-bottom rates for years, to materially increase their investment and spending because borrowing costs had dropped a little bit lower.
Not surprisingly, the initial response from businesses was muted. But the rate cuts caused the Loonie to plunge and our export manufacturers responded, albeit slowly at first, by ramping up production and hiring. Bluntly put, it’s hard for me to imagine that our policy makers, who spend their days focusing on the economic impact of their policy moves, could not have foreseen this chain of events that fits so perfectly with their long-term objectives.
At this point, you may be wondering what all of this has to do with Canadian mortgage rates.
The Loonie has appreciated from a low of 69 cents U.S. in January of this year to a high of 80 cents U.S. at the start of May. If the Loonie were to continue to rise, it could potentially undo our export-manufacturing sector’s hard-won momentum, and I don’t think the BoC will let that happen. Instead, if the Loonie continues to rise, I think the Bank will first adopt increasingly dovish language in an attempt to jaw-bone it back down, but if that doesn’t work, I think the BoC would be prepared to swallow hard and drop its overnight rate in order to curtail the Loonie’s rise (while citing every other factor besides the Loonie to justify its move).
So far this month the Loonie has sold off, falling to 77 cents U.S. at Friday’s close, so over the short term, some of the pressure is off. But if you’re wondering where our mortgage rates are headed over the short and medium term, use the Loonie’s value as a good gauge of what the BoC will do next, and let Governor Poloz’s actions speak louder than his words.
Five-year Government of Canada bond yields fell by fifteen basis points last week, closing at 0.73% on Friday. Five-year fixed-rate mortgages are available in the 2.39% to 2.59% range, depending on the terms and conditions that are important to you, and five-year fixed-rate pre-approvals are offered at around 2.79%.
Five-year variable-rate mortgages are available in the prime minus 0.30% to prime minus 0.40% range, which translates into rates of 2.30% to 2.40% using today’s prime rate of 2.70%.
The Bottom Line: Our economy needs a cheap Loonie to stimulate the kind of export-led growth that is critical to its achieving healthy and sustainable momentum. The BoC understands this well, and the value of the Loonie will have an overriding influence on what the Bank says and does, despite its protestations to the contrary. Stay tuned.
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
May 9, 2016
Mortgage |