The Bank of Canada announced it’s leaving the overnight lending rate unchanged at one per cent in yesterday’s announcement, a move that encourages more borrowing. This comes despite our dollar being at a four-year low.
Speaking to reporters after the announcement, Bank of Canada Governor Stephen Poloz said his main concern is inflation, and its inability to reach its two per cent target. Here are the key takeaways from Poloz’s announcement and commentary.
The Low Dollar Is Not His Focus
Poloz stated that markets will ultimately decide the exchange rate, adding a lower dollar means better business activity, thus helping get inflation back to more normal levels. He said, “Our focus is on inflation and will our forecast work out that gets inflation back to target around two years from now? That’s our main preoccupation and markets will choose to grind out an exchange rate independently of that.”
Business Competition Will Continue
Exporters have had the most to gain from the lower dollar. With the U.S. economy looking rosier, this is creating an optimal situation for Canadian businesses to sell their goods across the border. The U.S. is our biggest trading partner; 75 per cent of our exports go there. It’s important that our businesses remain attractive and cheap and the U.S. appetite for goods and services remains strong. Economically speaking, this is what 2014 is shaping up to look like.
The Economy Is Growing
The lower dollar has lead to better economic growth in Canada. The BoC reported Canada’s growth improved in the second half of 2013 and projects it will continue to grow in 2014 and 2015, eventually returning to full production capacity over the next two years. Poloz also noted that business competition here at home has helped push the inflation rates lower. For example retailers have slashed prices to attract customers and the automotive industry has seen a boost in sales, as rates remain low and affordable. Canadians bought 1.74 million cars last year. He expects these prices to remain lower even if inflation gets back to normal.
Mortgage Rates Will Remain Low
Recently, Canada’s big banks lowered their fixed mortgage rates. This is giving Poloz less reason to lower the overnight lending rate, a notion that was earlier suggested to further boost the economy. Poloz remains concerned about the record amount of household debt that Canadians are in and the high ratio mortgages many are carrying. But, unlike his predecessor, he didn’t wag his finger at Canadians and tell them to pay down their debt. In fact Poloz took a much different stance, telling reporters: “it’s not the Bank of Canada’s job minutely to try to influence these things in an independent way,” adding, “Mortgage rates are driven by (bond) market rates, not by the Bank of Canada.”
No Surprise Here
No one expected that the central bank would raise rates in this announcement. In fact, Poloz signaled the rate is likely to remain low, despite that it’s been at one per cent since September 2010.
“We think interest rates will stay where they are for quite some time and so issuing a warning that they’re almost ready to go up is not the right timing. We believe it will happen as the story unfolds but the destination seems far enough away that we can address that as we get closer.”
Rates Moving Forward
Poloz is looking to the U.S. for signals of what he can do with interest rates. Generally he was dovish on interest rates, meaning they could remain low for the better part of 2014. In my opinion, households carrying large amounts of debt should use this extra time to focus on paying down their debt and resist temptation to take on more debt unless it’s for investment purpose. Borrowing to start a business makes sense but to purchase a car or more clothes is not a good idea, despite how low rates are.