Editor's Note: The Interest Rate Update appears weekly on this blog - check back every Monday morning for analysis that is always ahead of the pack.
Canadian economic growth has surged of late.
Our GDP grew at an annualized rate of 2.6% in the fourth quarter of 2016 and last week we learned that it grew by another 0.6% in January. That momentum has economists now raising their GDP growth forecasts for the first quarter of 2017 to as high as 4%.
These recent GDP data contradict the widely held belief that Canadian economic momentum is lagging U.S. economic momentum, and also calls into question the assumption that the Bank of Canada (BoC) will stand pat while the U.S. Federal Reserve repeatedly raises its policy rate in 2017.
The BoC has said previously that it expects our output gap (which measures the gap between our economy’s actual output and its maximum potential output) to close around mid-2018. The Bank would typically begin to raise its policy rate at about the same time that this happens, so the closing of the output gap is a significant milestone for anyone keeping an eye on our mortgage rates.
The question now being asked is: If our economic momentum is accelerating and our output gap closes more quickly than forecast, will our mortgage rates rise more quickly than expected?
There is no one better than BoC Governor Poloz to answer that question, and he did so last week when he spoke at Durham College, in Oshawa (his home town). Here are the highlights from his latest speech:
- Governor Poloz’s talk focused on the importance of foreign investment, immigration and open trading relationships to Canada’s economic prosperity over the last 150 years. He provided numerous examples where periods of rising protectionism led to economic slowdowns both at home and abroad. (Are you listening President Trump?)
- He observed that while the Canadian and U.S. growth rates are “relatively the same” (our growth rate has actually been higher since the fourth quarter of 2016), “Canada has more room to grow because we have not recovered fully from the oil-price shock”. As a direct result, Governor Poloz noted that we have “more unemployment and more excess capacity”, which means that “we can grow faster than the U.S. for a while” before needing to raise interest rates in response.
- He justified the continuation of the current period of ultra-low interest rates by pointing out that “the financial crisis of 2007-08 has left us a legacy, with the recession that followed, that makes it almost like we’re riding a bike up a hill ... and if we were to raise interest rates prematurely, the economy would, I’m certain, have a recession”. He also said that the economic “forces of equilibration” that will bring our economy back into balance are exerting an impact, but observed that they are “acting more slowly than they have in past cycles”.
- In answering a question about how technological advancements are displacing old-economy jobs, Governor Poloz expressed confidence that new jobs that can’t always be envisioned would be created “out of thin air” as technological progress continues to evolve. To prepare for this still-evolving new world, he advised students to focus their efforts on “learning to learn”, so that they can best adapt to this new world. He suggested that they worry less about practical applications that may quickly become out of date, and emphasized mastering “tools instead of apps”. His key message here was really about the importance of being flexible in uncertain times – and he clearly wants to preserve that same flexibility for our economy by maintaining the Bank’s current monetary policy for some time yet.
In summary, Governor Poloz did not sound like a policy-maker who is recalibrating the BoC’s rate-hike timetable in response to the recent improvement in our economic momentum. His comments described our economy as still being in the midst of a long recovery with plenty of room left to grow before it gathers enough momentum to fuel materially higher inflation. Against that backdrop, any near-term change in the BoC’s monetary policy still seems unlikely.
Five-year Government of Canada bond yields fell one basis point last week, closing at 1.12% on Friday. Five-year fixed-rate mortgages are available at rates as low as 2.44% for high-ratio buyers, and at rates as low as 2.49% for low-ratio buyers. If you are looking to refinance, you should be able to find five-year fixed rates in the 2.69% to 2.84% range, depending on the terms and conditions that are important to you.
Five-year variable-rate mortgages are available at rates as low as prime minus 0.80% (1.90% today) for high-ratio buyers, and at rates as low as prime minus 0.60% (2.10% today) for low-ratio buyers. If you are looking to refinance, you should be able to find five-year variable rates in the prime minus 0.45% range (2.25% today), depending on the terms and conditions that are important to you.
The Bottom Line: The recent improvement in our economic momentum has some market watchers speculating about whether the BoC may start hiking our interest rates more quickly than expected. But based on his comments last week, and for the reasons outlined above, I don’t think BoC Governor Poloz shares that view. If I’m right, that means that our fixed and variable rates should continue to remain at or near their current levels for the foreseeable future.
David Larock is an independent mortgage broker 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