Up, down – where are rates going next? And why can’t our policy makers seem to agree on whether they can (and should) rise?
Canada’s mortgage market is heavily influenced by two main factors: the monetary policy set by our central bank (the Bank of Canada), and our government’s Department of Finance. It is the former who has kept the cost of borrowing at record lows since September 2010 – and it’s the DoF who steps in with occasional tweaks to the market to tame the spiking prices and consumer debt levels that result from such low rates.
Now, opposing messages have been released by the two institutions regarding the potential for rising interest rates.
They’re Going Up, No Matter What – Flaherty
It has long been DoF Minister Jim Flaherty’s spiel that rates will, and must, eventually rise. He has repeatedly stated that consumers shouldn’t get too comfortable with the Bank’s current one per cent Overnight Lending Rate, and that an increase is inevitable as economic conditions improve, with mortgage rates along for the ride.
Just last week, he stated that interest rates will go up in the long term, regardless of recent actions by global central banks saying, “The pressure on interest rates is clearly on the upside,” and adding that our current low rate environment is an anomaly.
Low Central Bank Rates Are The Global Norm
And global banks have been taking a very low rate stance indeed. In their last rate announcement, the Bank of Canada dropped any hint of its previous rate bias, which included their projection of when rates will rise again.
In Europe, the ECB has cut their rate to a record low 0.25 per cent to allow for easier recession recovery. In the U.S., they’re topping their own 0.25 per cent rate with further stimulus in the form of bond buying,referred to as quantitative easing. That approach isn’t expected to change until early 2014, as Janet Yellen, the anticipated replacement for Chairman Ben Bernanke, has indicated she feels employment benchmarks are still to low to allow for a taper.
There’s No Reason For Rates To Rise – John Murray
Economic improvement is widely considered to be the signal for a central bank rate increase. However, this is not necessarily the case, according to a dissenter from the BoC itself.
Deputy Governor John Murray wrote this week that even if economic conditions do hit their forecasted benchmarks, it’s not set in stone that rates must rise in tandem. In his article, in which he confronts the top misconceptions surrounding monetary policy, he states, “Headwinds and tailwinds are often present, threatening to push economic activity and inflation higher or lower.
“Monetary policy needs to lean against these forces with opposing pressure from higher or lower interest rates to stabilize the economy and keep inflation on target.”
He also added that market and analysts’ obsession with U.S. Federal Reserve policy is more often moot – while investor reactions to U.S. policy have the ability to affect Canadian rates, mainly through bond yield fluctuations, they often ignore the full picture of employment numbers and overall financial stability.
Week In Review
There was no movement across the board this week – stability so far for both fixed and variable rate options!