Dave Larock in Interest Rate Update, Mortgages and Finances
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The Bank of Canada (BoC) left its policy rate unchanged last week, as was widely expected.
The Bank also released its latest Monetary Policy Report (MPR), which provides us with its views on the state of our economy and includes projections of where it thinks our economic growth will be headed over the next several years.
In the latest MPR, the BoC emphasized rising uncertainty as a central theme, both for businesses, when making investment decisions, and for central bankers, when trying to determine the optimal path forward. The Bank highlighted the unknowns surrounding Brexit as the main source of today’s uncertainty, but the worry list doesn’t stop there. Other current sources of uncertainty include: the U.S. presidential election, China’s debt bubble, Japan’s relentless quantitative easing, and the Italian banking crisis … just to name a few.
Here are the highlights from the latest MPR:
- The Bank lowered its projections for global GDP growth from 2016 to 2018 by 0.1% each year to account for weaker business and consumer confidence levels and noted that “financial conditions, already accommodative, have become even more so”. The era of ultra-cheap money continues.
- The BoC noted that domestic growth has been “uneven”, with first quarter GDP growth of 2.4% followed by a 1% contraction in the second quarter as a result of “volatile trade flows, uneven consumer spending, and the Alberta wildfires”. The Bank is forecasting a 3.5% GDP growth rate in the third quarter as “oil production resumes and rebuilding begins in Fort McMurray”, as consumers get a “boost from the Canada Child Benefit” and as “federal infrastructure spending and other fiscal measures announced in the March budget also contribute to growth.”
- The BoC explained that its domestic GDP-growth forecasts have been revised downwards “in light of a weaker outlook for business investment and a lower profile for exports”. Interestingly, the Bank noted that, until now, it had assumed that cyclical factors were to blame for our lacklustre business spending. But in its latest MPR, the BoC speculates that this stubborn trend may, in fact, be caused by “demographic forces or some other structural factors [that] are more relevant than previously estimated.”
- The BoC cited reduced U.S. demand for our non-resource based exports when downgrading our short-term GDP group forecasts and expressed hope that export demand would pick up in the second half of 2016. This will be an important development to watch. The Bank has repeatedly said that any healthy Canadian economic recovery must be underpinned by a rise in export demand, which then fuels increased business investment in productivity enhancements and expansion. We had a good, steady run of non-resource based export growth from 2008 all the way up to the start of this year but the increased business investment that was supposed to result from rising exports never took hold. And now, export sales have fallen for four straight months, making any follow-through bump in business investment unlikelier still.
- The BoC noted that some domestic financial vulnerabilities are elevated and still rising. As households “become more indebted, their spending may be more sensitive to adverse shocks.” Also, the Bank warned that continued house-price appreciation in the Vancouver and Toronto areas heightens the risk that these prices are being driven “by self-reinforcing expectations”, and cautioned that this increases both the “likelihood and severity of a retrenchment in consumption should a house price correction occur.” In other words, if prices fall sharply, it will hurt the economy, and the higher and faster prices rise, the greater the likelihood that this will happen.
- The BoC is forecasting that our output gap will close “towards the end of 2017”. (As a reminder, the output gap measures the difference between our actual output and our maximum potential output.) The Bank also expects our overall inflation rate, as measured by our Consumer Price Index (CPI), to return to its 2% target around that time. These are important milestones for anyone keeping an eye on Canadian mortgage rates because the Bank would be expected to start raising its policy rate on or about the time when our output gap closes and when our CPI growth rate returns to the Bank’s 2% target. To be clear, though, the BoC has been forecasting a tightening of monetary policy about that far in the future for almost a decade now, and so far it hasn’t happened. So let’s take that forecast with a grain of salt.
For the time being, the BoC remains stuck in wait-and-see mode, keeping what little powder it still has dry while key events play out at home and abroad.
Five-year Government of Canada bond yields rose thirteen basis points last week, closing at 0.65% on Friday. Five-year fixed-rate mortgages are available in the 2.39% to 2.49% range, depending on the terms and conditions that are important to you, and five-year fixed-rate pre-approvals are offered at about 2.54%.
Five-year variable-rate mortgages are available in the prime minus 0.40% to prime minus 0.50% range, which translates into rates of 2.20% to 2.30% using today’s prime rate of 2.70%.
The Bottom Line: The BoC maintained a cautiously optimistic view of our economy’s prospects in its latest MPR and while some hoped that a rate cut might be in the offing, it was never a realistic possibility. That said, it appears that any rate hikes are still far off on the horizon and that should help to keep both our fixed and variable rates 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
July 18, 2016
Mortgage |