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The Bank of Canada (BoC) left its overnight rate unchanged last week as expected and it also released its Monetary Policy Report (MPR). This is an important document for anyone keeping an eye on Canadian mortgage rates because it provides us with the Bank’s views on the state of our economy and includes projections for both foreign and domestic economic momentum over the next several years.
Here are five highlights from the latest MPR commentary on the state of the Canadian economy:
- The Bank did not seem overly concerned about the spike in our core inflation rate to 2.4% in March, attributing this rise to the temporary “pass-through effects of the lower Canadian dollar and some sector specific factors.” Most importantly, the BoC expects that both our overall inflation and our core-inflation rates will trend toward its 2% target “on a sustainable basis” as our output gap closes “around the end of 2016”. (As a reminder, the output gap is the difference between our actual output and our maximum potential output. Interest rates would normally be expected to rise at or about the time when the output gap closes.)
- The Bank now believes that the negative impact of lower oil prices on our economy was “more front-loaded” than it had originally predicted, but that “the total drag associated with the decline is expected to be about the same” as originally forecast. Somewhat more ominously, the BoC warned that “the full impact of the decline in oil prices has yet to show up in the employment statistics” and that there will be “important downside risks to oil prices” for the remainder of 2015.
- The Bank recognized that the “temporary weakening in the U.S. economy early in the year” has slowed its hoped-for virtuous cycle, where our cheaper dollar fuels a rise in export demand, which triggers an increase in business investment, which then improves employment opportunities. That said, the latest MPR noted that “capacity pressures were more prevalent among export oriented firms” and that it expects improving U.S. economic growth will help re-establish this “natural sequence” by mid-2015, although with more support coming from rising export demand and less from an improvement in business investment. (The BoC “expects investment in the oil and gas sector to fall by about 30 per cent in 2015”, while investment outside of the oil and gas sector “is expected to increase by about 7 per cent per year, on average.”)
- The Bank believes that its decision to cut its overnight rate by 0.25% in January “should help mitigate financial pressures in the household sector by cushioning the decline in income and employment caused by lower oil prices”. This seems like a stretch to me. Borrowing rates were already at near-record lows and banks passed only a partial 0.15% of that 0.25% rate discount to consumers, thus providing only a minimal offset to the more acutely felt impact of job losses and reductions in hours worked.
- The Bank continued to believe that “a soft landing in the housing sector” is the “most likely scenario, although it believes that “elevated house prices and debt levels relative to income continue to leave households vulnerable”. More specifically, it highlighted “the adverse impact of the oil price shock in Alberta and continued robust price growth in Toronto and Vancouver” as its areas of most concern. That reads to me like a nudge to Federal Finance Minister Joe Oliver to consider another round of rules changes for mortgage underwriting, which have become a rite of spring in recent years.
Here are the highlights from the MPR’s commentary on the state of the world’s largest economies:
- The Bank remains optimistic about the strength of the U.S. recovery, despite weak first-quarter economic data. It expects that continued employment growth and rising consumer confidence will combine with lower oil prices to raise disposable incomes and spur an increase in household spending. The BoC is calling for “strong growth” in new U.S. housing construction and a rise in business investment supported by “healthy” corporate balance sheets.
- The Bank is calling for improved economic activity in the euro area, believing that the region’s still relatively new quantitative easing programs will combine with lower oil prices to fuel a “modest and uneven” recovery.
- The Bank still believes that Gross Domestic Product (GDP) growth in Japan will “increase over the projected horizon”, but it recognizes that the “weak increase in real wages” and “low confidence” are hindering that country’s recovery.
- The Bank acknowledges that a property-market correction and weaker investment are hindering China’s growth prospects, while it anticipates “solid growth” in India. Interestingly, the BoC notes that lower commodity prices are dampening the growth prospects of emerging-market commodity exporters and that “geopolitical uncertainty is exacerbating these negative effects”, though it does forecast a slight improvement in its GDP growth forecasts for the “Rest of the World” category that captures this group.
The latest MPR report follows a familiar pattern where near-term forecasts for both domestic and international growth are downgraded to reflect the current reality, while medium and longer-term forecasts are raised as a hopeful offset. If I sound unconvinced, it might be because I remember an adage from my old boss, who used to say that the weather today is the best predictor of the weather tomorrow. If that wisdom holds true for our economy, which usually does, we’ll be needing our umbrellas for some time yet.
Five-year Government of Canada (GoC) bond yields rose by seven basis points last week, closing at 0.86% on Friday. Five-year fixed-rate mortgages are offered in the 2.54% to 2.64% range, and five-year fixed-rate pre-approvals are available at rates as low as 2.69%.
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: In its latest MPR, the BoC expressed hope that the U.S. economy’s first-quarter slump was a temporary setback, and that a rebound in U.S. growth will take our economy along for the ride. The Bank is hopeful that this will roughly offset the negative impact of the current oil-price shock while providing enough momentum to help ensure a soft landing in our housing sector, which it deems vulnerable to our elevated household debt levels. Time will tell.
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
April 20, 2015Mortgage |