Leave Rates Alone… For Now: C.D. Howe Institute

CD Howe Institute Central Rates Report findings

The Bank of Canada released their most recent rate announcement this Wednesday, leaving the central cost of borrowing untouched at one per cent, where it has remained since September 2010. It’s the right move, according to one of Canada’s most trusted think tanks, which has stated rates need to stay where they are until next spring if the economy is to truly recover. The prescriptive findings come from the C.D. Howe Institute’s Monetary Policy Council (MPC), which is made up of some of Canada’s most respected economic forecasters, including Senior Vice President and Chief Economist at TD Bank Group, Craig Alexander and Associate Professor of Economics at Carleton University, Nicholas Rowe.

But, the Council says an imminent rate hike is necessary – they’ve also called on the BoC to rate central rates by 1.5 per cent by this time next year, resulting in a slow and steady increase that will make consumer loans more expensive, and give savers more return on their fixed income investments.

A Step Back From Neutral

Due to the tragic events that occurred in Ottawa on October 22, the BoC cancelled their scheduled press conference. However, they released what would have been their statement, which points to new challenges facing economic growth, such as geopolitical tensions and dropping energy prices. In it, Governor Stephen Poloz remarks “The good news for Canada is that the U.S. economy is gaining traction, particularly in sectors that are beneficial to Canada’s exports.” He also cited that trade has got a lift from a lower Canadian dollar. Despite all this good news, Poloz kept rates the same because “our export sector is less robust than in previous cycles.” This is a step back from previous Monetary Policy Announcements, where the BoC took a neutral stance, stating they would neither influence economic growth or decline through their interest rate announcements.

Also Read: A Neutral Stance for the Bank of Canada>

What Will This Mean For Your Mortgage?

Anyone locked into a fixed term mortgage will not see rates rise, but those in a variable rate mortgage will see their payments get immediately more expensive. Keep in mind, homeowners who plan to renew their mortgage when the time comes should be preparing themselves for higher rates of borrowing. Even a year of making extra payments in a very low interest rate environment can make a significant dent on the principal you owe and reduce your future interest payments.

Variable mortgage holders also have the option to switch to their lender’s fixed rate for the same term, which, depending on market conditions at the time, may or may not be cheaper.

What Will This Mean For Your Investments?

A rise in rates is good news for the ultra-conservative investors that have been waiting to see a better rate of return on their fixed term investments and their money market funds. All these rate will rise with the BoC does raise rates. This could mean Canadians feeling more encouraged to take on less debt and save more. Which overall would be a better economic situation.

Also Read: Prep Your Investments for Higher Interest Rates>

Why A Rate Rise is Coming

MPC pointed to a number of positive indicators in respect to Canada’s economic performance, such as consumer price inflation near target and moderate wage growth. Other positives were reasonable employment growth and moderate credit growth, as well as output growth running at a pace that seemed likely to bring gross domestic product (GDP) nearer its potential. Further, the overall growth outlook in the United States was generally seen as building momentum.

Lingering Credit Concerns

MPC added they also perceive a buildup of negative risks abroad, which strongly coloured sentiments. Among the concerns raised were continued turmoil in Europe and an apparent flagging of growth expectations in Germany. Recent drops in energy commodity prices, while likely to put downward pressure on the Canadian dollar and eventually on measured inflation, were seen by the group as a significant negative influence on domestic output and exports. Financial market unrest and evidence of investor “flight to safety” also concerned MPC members.

What is the C.D. Howe Institute?

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. It is Canada’s trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review. The MPC’s next vote will take place on November 27, 2014, prior to the Bank of Canada’s interest rate announcement on December 3, 2014.





Related Topics

Economic News / Mortgage News / Mortgages

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