Dave Larock in Monday Interest Rate Update, Mortgages and Finance, Home Buying, Toronto Real Estate News Editor's Note: Dave's Monday Morning Interest Rate Update appears on Move Smartly weekly. Check back weekly for analysis that is always ahead of the pack.
The Bank of Canada (BoC) released its latest Monetary Policy Report (MPR) last Wednesday and left its policy rate unchanged at 1%, as was universally expected.
I read the MPR with great interest because it gives us the BoC’s views on the state of the world’s economies and includes projections for where the Bank sees foreign and domestic economic momentum headed over the next several years.
Here is a summary of the latest MPR:
- The BoC’s projections for Canadian GDP growth were largely unchanged from its January MPR. The only material difference was a reduction in its Q1, 2014 GDP forecast from 2.5% to 1.5%, a slowdown that the Bank attributed primarily to weather-related factors. Canadian GDP is forecast to grow by 2.5% in 2014 and 2015, before levelling off at 2% in 2016. On an overall basis, the Bank maintained its view that increases in export demand and business investment will be the most critical elements in our long-term economic recovery.
- The BoC continues to worry about disinflation risks. It believes that the upward pressure we are seeing from higher energy prices and the cheaper Loonie will be temporary and will be more than offset by heightened retail competition and the continuing gap between our actual economic output and our maximum potential economic output (referred to as the output gap). The Bank expects our output gap to close in early 2016 and projects that it will be “close to two years” before core inflation returns to its 2% target. Both of these forecasts imply that our interest rates should stay at or near today’s ultra-low levels well into 2015.
- The BoC’s projections for global GDP growth remained largely unchanged from the January MPR. The Bank expects that “rising global demand for Canadian goods and services, combined with the assumed level of high oil prices” will buoy our economy. The latest MPR also supports the view that the U.S. economic recovery will continue to gather strength and, in doing so, will create positive spillover effects for the Canadian economy.
- The BoC highlighted several areas of concern in its latest MPR, most notably financial vulnerabilities in China and in other emerging market economies, deflation risks in Europe combined with potentially destabilizing impacts from the Ukraine/Russia conflict, and the re-emergence of disinflation risks in Japan.
- Meanwhile on the home front, while the Bank believes that we will experience “a soft landing in the housing market and stabilizing debt-to-income ratios for households”, it continues to maintain that “the risks associated with household imbalances remain elevated”. Despite this, in his accompanying commentary BoC Governor Poloz said that he “cannot shut the door” on the possibility of a rate cut if circumstances warrant. I suspect that last comment was designed to talk the Loonie down, rather than to provide any serious indication that a rate cut is on the horizon.
In addition to these summary points, the latest MPR also provided some insightful commentary on the mixed blessing that is our cheaper Loonie.
Like most market watchers I applauded the cheaper Loonie as a source of stimulus for our economy, focusing primarily on its lowering the relative prices of Canadian exports sold in foreign markets. But after surveying affected areas of the business sector, the BoC points out in its latest MPR that “the more immediate and widespread impact” on Canadian businesses over the short term has been on “the rate of increase in their non-labour input costs, mainly through the higher cost of imported intermediate inputs”.
In other words, the most significant impact of the cheaper Loonie thus far has been to push up the cost of the goods that are imported by our export manufacturers. These exporters have thus far been reluctant to pass those cost increases on to foreign consumers because “intense competition continues to exert downward pressure on output prices”. So while the cheaper Loonie should help our exporters to be more competitive over the longer term, it has actually created an additional headwind for them in the form of higher input costs over the nearer term.
Last week the Office of the Superintendent of Financial Institutions (OSFI) also released a draft of its latest changes to the Residential Mortgage Insurance Underwriting Practices and Procedures, which the media has dubbed the B-21 regulation changes. The mortgage world held its collective breath because OSFI’s preceding changes (known as B-20) were sweeping in nature and many inside the industry feared that another round of comprehensive mortgage-credit tightening would be too much too soon. Many industry stakeholders believed that the multiple rounds of previous mortgage-underwriting rule changes had not been given enough time to fully permeate our real estate markets and that further tightening should be delayed until the impact of prior changes could be more fully quantified.
They needn’t have worried. When OSFI released its B-21 draft last Monday, it was basically just a reminder that insurers and lenders should be careful and thorough when underwriting loans. My guess is that B-21’s “six fundamental principles for sound mortgage insurance underwriting” will be cited when OSFI conducts future insurer audits, but as far as policy changes go, B-21 did not break any important new ground.
Five-year Government of Canada bond yields rose by seven basis points last week, closing at 1.72% on Thursday. Five-year fixed mortgage rates are still available in the 2.84% to 2.99% range, and five-year fixed-rate pre-approvals can still be had at rates as low as 3.09%.
Five-year variable-rate mortgages are offered at rates as low as prime minus 0.65%, which works out to 2.35% using today’s prime rate of 3.00%.
The Bottom Line: Last week I wrote that the BoC’s latest rate announcement and the release of its April MPR, combined with the announcement of OSFI’s B-21 guideline changes, meant that the Canadian mortgage landscape might look a lot different by the time the Easter Bunny was hiding eggs on Sunday.
In the end it didn’t.
The BoC basically confirmed that events are unfolding largely as it expected and maintained its steady-as-she-goes approach to interest-rate policy. For its part, OSFI decided that instead of using B-21 to rock the regulatory boat, it would use it to remind high-ratio mortgage insurers to make sure that their existing boats have life jackets and paddles in good working order.
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 (movesmartly.com) and on his own blog integratedmortgageplanners.com/blog). Email Dave
April 23, 2014
Mortgage |