DLC Chief Economist Comments on BoC Rate Announcement

Dr. Sherry Cooper, Chief Economist for Dominion Lending Centres (DLC) was expecting the Bank of Canada to leave interest rates unchanged today in the wake of the surprising rate cut in late January. Governor Stephen Poloz signaled this wait-and-see stance last week, following criticism that his surprise move had destabilized financial markets, thwarting the Bank’s efforts to boost economic activity. “The Bank has become increasingly concerned about the dampening impact of the plunge in oil prices on business capital spending and production in the oil sector—a key component of Canadian economic expansion in the past,” said Dr. Cooper. Recent layoff announcements in the oil patch exacerbate this concern.

“For now, core inflation in Canada remains quite low, giving the Bank plenty of leeway to maintain a very accommodative policy stance,” said Dr. Cooper. “However, the weakness in the Canadian dollar will increasingly show through in rising import prices, as so many consumer and business products are imported from the U.S.”

The Bank of Canada continues to project that the dampening impact of lower oil prices will be felt in the first half of this year, leaving open the possibility of another rate cut in coming months, maybe as soon as its next meeting on April 15. The hope is that the weaker Canadian dollar will offset the oil price shock by boosting non-energy exports and investment. Lower oil prices have been good for consumers and non-energy businesses that are heavy users of energy.

Dr. Cooper believes that with “the U.S. economy leading global economic expansion, the Federal Reserve is poised to hike rates for the first time in nearly eight years, probably by the late-June meeting. This alone will put some further downward pressure on the Canadian dollar. Hence, the Bank of Canada’s caution in cutting rates now; but if non-energy exports and business investment do not follow through, the Bank will cut interest rates further, accepting the Canadian dollar fallout”.

“My view is that the Canadian economy will grow at about a 2-1/4 percent pace this year with long-term yields edging higher by yearend. In sum, while mortgage rates might fall a bit further in the next couple of months,” said Dr. Cooper. “They are headed higher by year end. The rise, however, will be muted. Next year, expect the Bank of Canada to begin to tighten, raising overnight rates very gradually. This, of course, is predicated on a near-term bottoming in oil prices, edging to the $60-to-$65 a barrel range in the next year. As always, central bank action will be data dependent.”

What do low rates mean for a potential housing bubble?

Finance Minister Joe Oliver has assured Canadians there is no housing bubble developing, despite record low interest rates that may entice some buyers to purchase more home than they can likely afford.

“I’ve said again and again we don’t think there’s a bubble – the Bank of Canada agrees with that, CMHC (Canadian Mortgage and Housing Corp), OECD (Organization for Economic Cooperation and Development),” Finance Minister Oliver told reporters last week, according to the Financial Post. ““We’re, of course, monitoring the market. It’s not a huge concern at this point.”

Oliver has held an optimistic view of the housing market and its future since he took office in March of last year, and last summer, when a number of lenders dropped their five-year fixed rates, Oliver voiced his opinion that it is not up to the government to oversee interest rates.

“I don’t think it’s the role of government to set interest rates or rates for mortgages,” he told Business News Network in Mid-June. “The rates are quite low and they’ve been coming down but a very small amount.”

He also noted at the time that the market was healthy.

Interest rates have been a hot topic since the Bank of Canada slashed its overnight rate by one-quarter of one percentage point to ¾ per cent on January 21.

Several of the big banks followed by slashing their own prime rates and also offering special-priced fixed mortgage rates on various products. 

Almost Half of Canadian Credit Card Holders Have Debt

A poll by the Bank of Montreal found that 46 per cent of Canadians who hold a credit card have debt on the account. Following the holiday season 28 per cent of card holders added on average $1,192 to their card balance. Almost a third (30 per cent) of card holders carry a monthly balance although 51 per cent do. Millennials are most likely to view a credit card as ‘extra spending money’. BMO’s Nick Mastromarc says that while credit cards are a useful payment tool they should not be viewed as additional borrowing and warns that: “unchecked spending habits can result in getting stuck in continuous monthly debt cycles that can hamper near and long term financial goals.” He recommends speaking with a financial planner to ensure the best management of household spending. 

Rate Cut Talk Gathers Pace

More experts are joining the voices calling for a further cut in interest rates when the Bank of Canada announces its decision next month. The bank’s senior deputy governor Carolyn Wilkins said yesterday that “the economy still has room to grow” and that the bank’s monetary policy will “support the needed adjustments.” She said that the economy needs to adjust to the lower oil prices and that the bank doesn’t want to do anything that could stifle that. The labour market is one of the main areas of concern, especially with lay-offs in the energy sector, along with output and Ms. Wilkins believes that the gaps will close over time. She says that low and stable inflation will help boost investment and prompt the creation of more jobs. The Bank of Montreal’s senior economist Benjamin Reitzes says that we should “Look for another rate cut in March, and don’t count out further easing.” The rate decision will be announced on Mar. 4.

Top five takeaways from Bank of Canada's surprise rate cut

The Bank of Canada surprised markets Wednesday with a 25 basis point cut to its benchmark interest rate. It marks the first time since September 2010 that the bank has moved on rates and a surprise to most as the BoC was scheduled to raise rates in 2015.

Most economists are predicting that we will now not see any interest rate hikes this year.

Below are five key takeaway messages from the rate cut, which brings the benchmark rate from 1% to 0.75%. 

Possible Rise in Unemployment
Oil  Price Uncertainty
Lower Inflation
New Financial Risks
Weak Canadian Economy


Click here to read the full article in the Financial Post.

Mortgage rates set to stay low for the next six months

Renewing a home loan shouldn’t be too painful for the next six months according to a new report from The Canadian Association of Accredited Mortgage Professionals. It’s predicting that the low rates should continue well into 2015 and that means those that have been used to paying at a higher rate can look forward to savings and that will be good news for the economy as a whole. CAAMP says that of the 1.35 million homeowners that have renewed or refinanced their loans during this year 1.05 million are now paying at a lower rate. Their figures also show that 16 per cent of those with a mortgage have increased the level of their monthly payments or paid a lump sum to pay down their loan faster. Another 7 per cent have increased the frequency of their loan repayments to fortnightly. Around 11 per cent have taken equity out of their home for other purposes including debt consolidation, home renovation or investments. Among first-time buyers the average down payment is 21 per cent with 11 per cent of respondents being gifted the money from a relative and 6 per cent receiving a loan from a family member.

Housing Demand Ratchets Higher in British Columbia

Vancouver, BC – November 18, 2014. The British Columbia Real Estate Association (BCREA) released its 2014 Fourth Quarter Housing Forecast today.

"Consumer demand has ratcheted up this year and is expected to remain at a more elevated level through 2015,” said Cameron Muir, BCREA Chief Economist. “While historically low mortgage rates support demand, the housing market is also being underpinned by a more robust economy and associated job growth, strong net migration and consumer confidence."

BC Multiple Listing Service® (MLS®) residential sales are forecast to increase 15.1 per cent to 83,900 units this year. Stronger economic conditions are expected to be somewhat offset by higher interest rates later next year, and keep home sales from advancing much further. As a result, MLS® residential sales are forecast to edge up a further 1.2 per cent to 84,900 units in 2015. The 15-year average is 80,400 unit sales and a record 106,300 MLS® residential sales were recorded in 2005. 

The average MLS® residential price for the province is forecast to increase 6 per cent to a record $569,800 this year and a further 1.2 per cent to $574,300 in 2015. “New construction activity is generally keeping pace with population and household growth, keeping supply in line with consumer demand,” added Muir. BC housing starts are forecast to increase 4.6 per cent to 28,300 units this year and a further 1.4 per cent to 28,700 units in 2015.