Mar 6, 2020 - Bank of Canada Governor Stephen Poloz attempted to ease concerns yesterday that lower interest rates will further stoke overheated housing markets.
Poloz argued this week’s rate cut was needed to combat the risks posed by the current global health crisis, adding that the easing will in fact help stabilize housing markets.
“Not surprisingly, the threat to the global economy of COVID-19—the coronavirus—played a central role in our deliberations, and we are coordinating actively with other G7 central banks and fiscal authorities,” he said in a prepared speech on Thursday.
The 50-bps rate cut was in stark contrast to the cautious “wait-and-see” approach that the Bank had previously adopted as it held rates steady while dozens of central banks around the world were cutting rates to head off growing economic headwinds. This week’s rate move also flew in the face of Poloz’s own fears about further stoking heated housing markets.
Just two months ago, Poloz told BNN Bloomberg: “Should this housing rebound continue, we will be watching for signs of extrapolative expectations returning to certain major housing markets—in other words, froth…It can be very unhealthy when the situation becomes speculative.”
But extraordinary times call for extraordinary measures.
“…Risk management demands a prompt and sizable policy response to larger shocks to ensure that the economy remains well anchored. Governing Council agreed that the downside risks to the economy today are more than sufficient to outweigh our continuing concern about financial vulnerabilities,” he told a Toronto audience.
“Indeed, declining consumer confidence would naturally lead to reduced activity in the housing market. In this context, lower interest rates will actually help to stabilize the housing market, rather than contribute to froth.”
Capital Economics’ senior economist Stephen Brown hinted at this in a research note published last week.
“While [the Bank of Canada] has been worried about the effects of looser policy on house prices, it may become more welcoming of a further boost to housing wealth if equity values continue to plummet.”
That seems to be Poloz’s thinking. Even if people are losing confidence (and money) as a result of rising coronavirus infections and plummeting stock markets, they can at least be reassured that the value of their home is continuing to rise (so long as you’re not a first-time buyer looking to enter the market).
“Further, we expect that the B-20 mortgage lending guidelines will continue to improve the quality of the stock of mortgage debt,” Poloz added.
Remember, these are the same lending guidelines (for uninsured borrowers) that OSFI is proposing to loosen as early as this spring, pending a review of public consultation.
More Cuts Are on the Way
While Poloz is defending the Bank’s larger-than-expected rate cut this week, the easing is still far from done, at least as far as the markets are concerned.
Canada’s 5-year bond yield continued to fall on Thursday, coming within 0.36 percentage points of its all-time low. The continued panic over the growing fallout of COVID-19 has markets pricing in up to 75 bps of rate cuts by October, with the next cut coming as early as April.
By the time all is said and done, this week’s 50-bps rate cut may look like just a warm-up.