The Central Bank announced that it is maintaining its overnight rate target at 0.5 per cent in an announcement
In a press conference following the announcement, Bank of Canada governor Stephen S. Poloz mentioned the federal government’s latest changes to mortgage regulations as one of the most important issues to factor into bank forecasts.
“The second major issue in our deliberations was the federal government’s recent move to strengthen mortgage markets. This is a welcome development, as it will mitigate financial vulnerabilities over time,” he said. “We expect it to reduce housing resales in the near term, and perhaps cause a shift toward the construction of smaller homes, which together will shave some spending in the economy. Although this effect is very uncertain, we have incorporated a shock of minus 0.3 per cent by the end of 2018, which is about half of our revision to the export outlook.”
He said that the new mortgage rules should mitigate financial stability risks over time, although both he and senior deputy governor Carolyn Wilkins acknowledged that the minus 0.3 per cent is a “highly uncertain figure,” partly because they have to see how the economy actually responds to the new rules.
“Our best guess is that it will slow down housing resales, but it may not.”
Wilkins said they also have to look at the implications of who will and who won’t qualify for a mortgage, and what their ensuing behavior might be – maybe homeowners will still buy houses, albeit less expensive ones, or maybe that they’ll buy smaller homes, for example – as well as taking into account that this is a change to restrict the quality of mortgages, but the supply constraints and other factors remain the same. There’s a bit of -wait-and-see' time built into the projections, but Wilkins said that the timing of those effects “is likely to be sooner rather than later.”
“In terms of financial stability, what that really does is it changes the mix in quality of borrowers that is out there and improves it,” Wilkins said. “These particular tools are targeting the actual issue. It’s not a change in the interest rates, which affect the economy more broadly.”
Economic growth is now projected to be lower than previously forecast in July’s Monetary Policy Report.
“This is due in large part to slower near-term housing resale activity and a lower trajectory for exports. The federal government’s new measures to promote stability in Canada’s housing market are likely to restrain residential investment while dampening household vulnerabilities,” the Bank said.
The global economy, which has been sluggish, is expected to pick up in the remainder of this year and on into 2018. Export data is improving, according to the Bank, but growth will be slower over the next two years than previously forecasted, due in part to lower global demand.
“After incorporating these weaker elements, Canada’s economy is still expected to grow at a rate above potential starting in the second half of 2016, supported by accommodative monetary and financial conditions and federal fiscal measures,” the BoC said. “As the economy continues to adjust to the oil price shock, investment in the energy sector appears to be bottoming out.”
Household spending is on the rise, as well as employment and incomes outside energy-reliant regions. The Bank forecasts real GDP growth of 1.1 per cent this year and “about” 2 per cent in 2017 and 2018.
There was also a particular focus on household financial vulnerabilities, which have continued to rise and are “top of mind” as opposed to other types of debt that affect the economy.
“[We’ve] focused on consumer debt because it’s been rising so much and it’s reached levels that have become quite important, and that sector is most important to future risk of Canada,” Poloz said.
He pointed out that if those household financial vulnerabilities that have been identified meet up with a global shock, then the effects on Canada would be magnified by the type and the quality of the indebtedness.
Another point to note is that Poloz said that the Bank had considered more monetary stiumulus, given the downgraded economic outlook, but ultimately decided against it because of some uncertainties that have the potential to clear up more quickly than usual, including the upcoming presidential election in the U.S., which creates uncertainty for investments in both the U.S. and in Canada. Because they weren't certain, they decided to leave rates unchanged for now.
The BoC now projects the economy will return to full capacity by mid-2018, which is much later than the original forecast of July 2016.
“Given the downward revision to the growth profile and the later closing of the output gap, the Bank considers the risks around its updated inflation outlook to be roughly balanced, albeit in a context of heightened uncertainty,” the BoC said.
“At present, the Bank’s Governing Council judges that the overall balance of risks is still in the zone for which the current stance of monetary policy is appropriate, and the target for the overnight rate remains at 1/2 per cent.”
Economists' reactions, however, suggest that the doors are open for another interest rate cut in the not-so-distant future.
“Over all, the bank is clearly on hold for the rest of this year," Paul Ashworth of Capital Economics said in the Globe and Mail. "Next year, however, we expect a more pronounced downturn in housing activity to prompt the Bank to cut interest rates to 0.25 per cent, from 0.5 per cent.”
Paul-André Pinsonnault and Krishen Rangasamy of National Bank agree to a point, with a different consideration. “The BoC is clearly communicating that rate hikes are not on the horizon. The central bank incorporated the new housing measures in its analysis and now expects housing to be a drag on growth next year. Note that the federal government will soon release its 2017 immigration target which is expected to be increased significantly from its current level of 300,000/year. If that pans out, housing demand in Canada’s largest metropolitan areas will be boosted. So, perhaps the drag from housing next year may not be as drastic as what’s estimated by the Bank of Canada.”
The next scheduled date for announcing the overnight rate target is December 7th.
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