Dave Larock in Monday Interest Rate Update, Mortgages and Finances
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The Bank of Canada (BoC) left its overnight rate unchanged last week, surprising some who expected that it would be lowered again after January’s emergency cut. Instead, the Bank judged the existing degree of monetary-policy stimulus as being “still appropriate” under the current circumstances.
While most observers expected the BoC to stand pat, there was still some uncertainty around what it would do, and I think that was by design. The BoC decided to drop its forward guidance last year, preferring to restore a bit more of an air of mystery to its decision-making process around rate setting. This approach keeps the market guessing and prevents speculators from getting too complacent or aggressive when betting on the future of Canadian interest rates and exchange rates. For example, when the BoC dropped its overnight rate in January, investors didn’t see it coming and the rate cut pushed both the Loonie and our bond yields quickly and decisively lower, creating maximum impact.
This time the market was ready for a BoC rate cut. And this time, we didn’t get it.
The idea that the BoC would cut rates last week was primarily based on historical precedent. When the Bank has dropped its overnight rate in the past, it has typically done so with a series of cuts before pausing to see how our economy absorbs the stimulus. But today we live in anything-but-typical times and the BoC’s decision to stand pat is in part a reminder that the monetary-policy road maps from past garden-variety recessions offer us little insight into what might lie ahead.
Here is a summary of the factors that led to the BoC’s decision:
The only part of the BoC’s recent commentary that puzzles me is Governor Poloz’s continued insistence that the Bank is not trying to push the Loonie lower. He has repeatedly said that any sustainable Canadian economic recovery will require a rebound in export demand that will fuel increased business investment. A cheaper Loonie offers the easiest and most comprehensive way to buoy our exports, and if the Bank isn’t overtly trying to make this happen, its actions could hardly be better designed to achieve this end.
When you look at the unprecedented and extreme approaches being adopted by so many of the world’s largest central banks, what’s the harm in talking down your currency to give your exporters a boost? Especially for a small, open-market economy such as ours? Doing so provides weakened and vulnerable parts of economy with much-needed stimulus without any of the radical balance-sheet expansion we have seen in other countries, and this dovetails perfectly with BoC Governor Poloz’s key goals for our economy.
BoC Governor Poloz can continue to deny that the Bank is adopting policies that are designed to push the Loonie lower, but the evidence to the contrary is overwhelming. If it walks like a duck, has feathers and a yellow beak, and quacks, Governor Poloz can call it what he wants but for me, it’s a duck.
Five-year GoC bond yields surged by twenty-seven basis points last week, closing at 1.00% on Friday. Five-year fixed-rate mortgages are still offered in the 2.59% to 2.69% range, and five-year fixed-rate pre-approvals are available at rates as low as 2.74%.
Five-year variable-rate mortgages are available in the prime minus 0.65% to prime minus 0.80% range, depending on the terms and conditions that are important to you.
The Bottom Line: The BoC has restored an air of mystery to the decision-making process of its monetary-policy that enhances its ability to impact bond yields and exchange rates and to keep would-be speculators on their toes. For now, the Bank is adopting a wait-and-see approach and while that means that our mortgage rates won’t be headed lower in our immediate future, nor should they be moving higher any time soon.
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