The Bank of Canada May Take a Neutral Stance on Interest Rates

Neutral Interest Rate Stance

Low interest rates may be the new normal, according to comments made by Bank of Canada Governor Stephen Poloz. While speaking on a national radio show, Poloz said rates “will and should” remain low for at least another two years – and went as far as to suggest that the BoC take a neutral stance on interest rates to further promote organic economic growth.

Currently, the overnight lending rate is 1 per cent, where it has remained since September 2010.

The BoC Wants Natural Growth, Fewer Rate Announcements

While Canada weathered the economic downturn better than most, we’re waiting on global conditions to steady, putting our economy in a holding pattern. According to Poloz, when global economic conditions do improve, it will be amid a much lower rate environment than seen in previously healthy economic times.

Taking a neutral stance would mean policymakers would neither influence economic growth or decline through their interest rate announcements; currently, the BoC releases eight per year. Poloz suggests this is necessary to allow Canada’s economy to grow naturally. For example, growth should be induced by business activity, spending and exports – not news of economic policy change.

Canadians Still Too Reliant on Cheap Debt

Poloz says due to the high level of household debt, any spike in the Bank’s interest rate policy would have a negative effect on the economy. He goes as far to say that a rate cut is not off the table but – in his own words – two years (rates have been forecasted to rise again by 2016) is a very long time.

A Shift in Economic Expectation

In my opinion, giving the economy the breathing room it needs to move organically is a step in the right direction. Doing so is in stark contrast to the current model; each run up to a BoC interest rate announcement causes the economy to pause, with all eyes on the Bank’s next move.

Poloz does not want the Bank to take the lead in this anymore and feels by pacing the announcements the economy will move without bias. And forecasts made in the announcements thus far have fallen short – Poloz considers the slow moving economy to be a “serial disappointment”.

Good News for Consumer Debt… For Now

Canadians can expect rates to stay low until as late as 2016, offering a short reprieve to those concerned about their debt levels. However, those carrying high amounts of debt should take the opportunity to aggressively pay it off while interest rates are cheap. Today’s low borrowing costs mean debt will reduce more quickly with extra payments and a smaller amount will be subject to higher rates when they do start to rise.

This is also not the time to take on more debt, despite what the short term future looks like.  It may be hard to believe now, but in the long run rates will rise and the time we are in right now indicates we are closer to the end of lower rates. Despite its wait and see approach today, in the long term the BoC will make the move to get back to more normal interest rate conditions.

 

Related Topics

Economic News / Mortgage News / Mortgages

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