[Bank of Canada] On Rates and the Canadian Housing Market
by Yvonne von Jena | July 13, 2017
With the first increase in interest rates in seven years, the Bank of Canada has confirmed that a near-decade-long era of low interest rates has ended. The Bank’s Monetary Policy Report provides insights into the Bank’s rationale for raising rates along with its analysis and views on the Canadian housing market.
The Bank raised its overnight lending rate by a quarter-percentage-point to 0.75% from 0.5%. It:
Shortly after the central bank’s announcement, many of Canada’s largest banks matched the move by raising their prime rates by about a quarter-percentage-point to 2.95%. Here is a chart that shows the Bank's rate over the past decade or so:
Says the Bank in its July MPR, Canada’s economy has been robust, fuelled by household spending. Growth in GDP in the first quarter of 2017 picked up strongly to 3.7%, which is in line with Bank’s expectations listed in its April MPR. Some of the economic factors noted by the Bank are as follows:
The Bank projects GDP growth at an average 2.5% in the second and third quarters of 2017 and expects that it will remain above potential output growth. Some of the economic factors the Bank notes:
Over the Bank’s longer projection horizon, it expects GDP growth to moderate further from 2.8% in 2017 to 2.0% in 2018 and 1.6% in 2019.
Until very recently, housing market activity had been quite strong in some regions says the Bank. However, it expects housing activity to ease going forward. In describing the housing market, the Bank notes:
Looking ahead, the Bank anticipates that residential investment will contribute less to overall growth.
The move to higher rates is not just a Canadian phenomenon. As noted by the Globe, central bankers in the U.S. and Europe are also talking about ending measures put in place to keep credit flowing after the 2008-09 financial crisis. U.S. Federal Reserve Chair Janet Yellen told Congress recently that the U.S. economy is now healthy enough to handle further steady increases in its benchmark interest rate as well as a start to selling its $4 trillion store of commercial bond holdings later this year. The Fed has increased rates recently, is expected to continue doing so over the next few years although interest rates are likely to remain historically low over the longer-term. One of the challenges for our central bank and others around the world is that inflation is still low and falling. Central bankers typically raise rates to keep inflation in check. That is not the problem in Canada, where consumer prices have been rising at well below the Bank’s 2% inflation target. Notes the Globe, this is why Bank of Canada Governor Stephen Poloz said he’s looking beyond current conditions, focusing on where inflation will be a year or two from now. “Reacting only to the latest inflation data would be akin to driving while looking in the rear-view mirror,” he explained to reporters in Ottawa after the rate announcement.
The next scheduled date for announcing the overnight rate target is September 6, 2017. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR on October 25, 2017. Many economists are expecting at least one more rate hike this year, most likely in October, when the Bank releases its next quarterly forecast.