Mark Carney’s Last Rate Announcement
This coming week, it’s out with the old and in with the new at the Bank of Canada – and all eyes are on newcomer governor Stephen Poloz and the stance he’ll take on Canada’s Monetary Policy.
Poloz is taking the leadership reign from outgoing Mark Carney on Monday June 3, who is leaving his Canadian post to take the governor role at the Bank of England. Carney, who has been touted as the “rock star” of Canadian finance, has been credited for helping Canada weather the 2008 economic crisis better than most nations with a cautious and consistent approach to economic stimulus. As one of his final acts as Governor, Carney maintained the Overnight Lending Rate at one per cent, where it has been since September 2010, in this Wednesday’s announcement. It was a fairly predictable move – after all, throwing the economy into flux with an interest rate increase would hardly provide a smooth transition for incoming Poloz.
How Will Poloz Proceed?
Carney has set a stable course for Canada’s economic recovery by keeping interest rates, and the cost of borrowing, low. This has provided stimulus to the economy and avoided a credit crunch, as banks remain willing to lend money, and consumers remain willing to spend it. Economists had forecasted that these measures will remain in place into 2014, allowing economic drivers such as exports, business investment and consumer spending to catch up. The growth of these areas, along with inflation reaching its target of two per cent, will indicate the economy has recovered to capacity.
It is highly unlikely that Poloz will steer from this course of recovery, though pressure is mounting to increase interest rates as soon as it’s safe; the trick for Poloz will be choosing precisely the right time to pull the trigger. A report from the Paris-based Organisation of Economic Co-Operation and Development forecasts gains in the Canadian job market, with unemployment falling to 6.7 per cent, and a weaker currency spelling good news for the export industry. The report also forecasted growth of 1.4 per cent this year, and 2.3 per cent in 2014, fueled by strengthening conditions in the U.S., Canada’s largest trade partner. Should this progress continue, there is speculation that Poloz could be prompted to hike rates sooner than anticipated.
Poloz Faces Mortgage Market Challenges
While Carney leaves Canada’s economy in relatively stable condition, Poloz is inheriting a few key challenges that factor heavily into our economic recovery. For one, he must walk the fine balance between maintaining stimulus conditions while simultaneously reducing household debt levels; cheap borrowing has hardly dissuaded Canadians from taking debt on in the form of mortgages and credit.
He also faces the continued fallout of a softening housing market as a result of mortgage affordability restrictions introduced last July. These rules, which cut the maximum amortization for high ratio mortgages to 25 years, and effectively pushed some buyers out of the market, have resulted in a smaller buyer pool and a cooling of markets across the nation. As we’ve previously reported, Canada’s housing market is an important part of our nation’s economic engine, and a prolonged upset will lead to a slowdown in inventory, resulting in job loss in construction, sales and other relevant industries.
Moving Forward With the Department of Finance
While Finance Minister Jim Flaherty has expressed satisfaction with the market cool down, saying it was dangerously overvalued, Poloz will need to take this change in stride, as well as additional proposals to place the same restrictions on low-ratio buyers as well.
While it can’t be foreseen what measures Poloz will unveil, this is for certain: his first Interest Rate and Monetary Policy Announcement, coming up on July 17, is sure to draw attention nationwide.
Week in Review
It has been another week of little change for mortgage rates, with 1 and 5-year fixed staying consistent, and 10-year fixed sliding a basis point back to 3.54. Five-year variable also dropped by five basis points to 2.45 per cent – despite no movement announced in this week’s Overnight Lending Rate announcement.