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ARE FURTHER RATE CUTS COMING?

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.

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Why the third quarter of 2019 could see a spike in mortgage apps

There could be a spike in mortgage applications in the third quarter if a rate forecast from the British Columbia Real Estate Association is realized.


The association’s economists are expecting interest rates to ease during much of 2019 as weaker economic conditions force a hold-steady from the Bank of Canada.


If 5-year bonds maintain their current level, there should be a move for the 5-year qualifying mortgage rate, which has not moved for almost a year.


Their forecast calls for 5-year qualifying mortgage rates to fall from 5.34% in the first quarter of 2019, to 4.99% in the second quarter, and reaching a year-low of 4.84% in the third quarter.

Rates are then predicted to climb to 5.15% in the last quarter of 2019 and early 2020 before plateauing at 5.34% for the rest of 2020.


The 5-year average discounted rate is set for a drop to 3.44% in Q2 2019 (from 3.60% in Q1), then a low of 3.30% in Q3 before climbing back to 3.44% in Q4, 3.64% in Q1/2 2020, and 3.74% in Q3/4 2020.

BoC to cut rates?


There are some economists predicting that the BoC may actually cut rates in 2019 rather than just maintain their current level.


However, BCREA’s economists do not expect this, favouring a rate freeze in their outlook.


The outlook also notes that longer term, when the BoC moves towards a ‘neutral’ interest rate, its stated intention, the corresponding hike in the level at which mortgage borrowers are stress-tested will make that policy unsustainable under its current methodology.

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The prime lending rate at the country's five big banks will rise to 3.2 per cent, effective Thursday, following the Bank of Canada's rate hike  

Canada’s big banks will raise their prime lending rates to 3.2 per cent, effective Thursday, after the Bank of Canada boosted its trendsetting policy rate.

The Bank of Canada on Wednesday raised its target policy rate by 25 basis points to 1.0 per cent from 0.75 per cent.

“Recent economic data have been stronger than expected, supporting the bank’s view that growth in Canada is becoming more broadly-based and self-sustaining. Consumer spending remains robust, underpinned by continued solid employment and income growth,” the bank said.

After the central bank’s move, Royal Bank said that it will increase its prime lending rate to 3.2 per cent from 2.95 per cent, effective Thursday. Bank of Montreal, TD Canada Trust, Bank of Nova Scotia and Canadian Imperial Bank of Commerce will also raise their prime lending rates to 3.2 per cent.

Hawkish tone

More Bank of Canada hikes could be on the way. The bank’s statement accompanying the announcement strikes what several economists described as a “hawkish” tone, which means the bank is trying to tell the market that if the economy continues to outpace expectations and the data supports a move, it’s possible the bank could bring in another rate hike before the end of the year.

“The broad tone of the accompanying statement is generally balanced but it leaves the door wide open to further interest rate hikes,” said Derek Holt, head of capital markets economics at Scotiabank. “One should not rule out another hike over the duration of 2017.”

Dave McKay, RBC’s chief executive, told a financial summit in Toronto on Wednesday that increased payments on mortgages and other debts could hit the economy as people have less disposable income to spend elsewhere.

“That’s one of the effects that we don’t talk enough about,” McKay said. “As rates rise, as they did this morning, a greater amount of disposable income is coming out of purchasing power, which will slow down economic growth in other sectors. And that’s not a healthy thing in the long term.”

Wednesday’s rate hike wasn’t a huge surprise. Before the announcement, futures markets had pegged the odds of a 25-basis-point increase at about 50-50. Had the bank decided to hold rates steady, markets were of the unanimous view the bank would bring in a rate increase at its next meeting on Oct. 25.

The country’s big banks usually adjust their own prime lending rates in line with changes to the Bank of Canada’s target rate. Ahead of the Bank of Canada’s announcement, the prime rate at all five of the big banks was 2.95 per cent.

“We’ve been waiting for this for a long time,” said Rob McLister, founder of ratespy.com. “Rates have been rock bottom for an abnormally long time.”

Timing

So why did the Bank of Canada move rates now and not in October? Canada’s gross domestic product grew at an annualized pace of 3.7 per cent in the first quarter and 4.5 per cent in the second.

The Bank of Canada expected the country’s economy to slow a bit in the current third quarter, but things have been more robust than the bank had forecast in its July Monetary Policy Report.

The Bank of Canada said it is not following a specific plan to usher in future interest rate hikes. Rather, it said future decisions will be guided by economic data and financial markets, and the impact those might have on inflation.

In an interesting move, the bank added that it will pay “close attention” to the impact future rate hikes might have on household debt. The most recent Equifax national consumer credit trends report found that Canadian consumer debt climbed to $1.769 trillion during the second quarter, up from $1.666 trillion a year ago.

Regina Malina, senior director of data and analytics at Equifax Canada, said that for now, Canadian consumers seem to be paying back debt on time. That trend should continue so long as interest rates increase in a gradual fashion and employment markets remain strong, she said.

“It all comes down to how quickly it’s going to happen. If it’s going to happen slowly enough, Canadians should, in theory, be able to adjust to the changing environment,” Malina said. “Delinquency rates are still relatively low.”

Target rate

The Bank of Canada’s interest rate hike puts the target rate back where it was before the oil price shock in 2015. Two years ago, the bank cut the rate to 0.5 per cent to help Canada deal with the drop in oil prices. The bank’s rate hikes in July and on Wednesday reveal that the bank no longer believes the economy needs an emergency boost.

“The statement was replete with upbeat messages on the economy and the view that low inflation may not last,” said Douglas Porter, chief economist with BMO Financial Group.

Porter thinks its possible the bank might raise its target rate as high as 2.0 per cent by the end of next year. Prior to Wednesday’s announcement, BMO had expected the central bank’s policy rate would top out at 1.5 per cent in 2018.

“The somewhat aggressive hike and the upbeat view on growth point to more tightening than we previously expected over the next year,” Porter said.

Source: Financial Post with Canadian Press

 
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Financial experts say most Calgarians won't feel much pain as the Bank of Canada hikes its key interest rate to 0.75 per cent, the first increase in seven years.

 

"It's not going to have anywhere near the impact that a lot of people are afraid it will," financial advisor and educator Tammy Johnston told CBC News on Wednesday.

 

"If people are dealing with a variable rate mortgage or a line of credit, for $300,000, it is only going to increase their monthly payment by $37. While nobody wants to pay more, that isn't that much."

Johnston says, perhaps more importantly, consumers need to take a hard look at their monthly bills to find far greater savings.

 

"I can still have the lifestyle I want but reduce my spending on things that I don't want, don't need or wasn't even aware of," she said.

 

"That is a better long term strategy than getting all worked up about interest rates."

 

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Categories:   INTEREST RATES
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