This week the Bank of Canada kept its key interest rate unchanged at 0.5%.
The rational behind deciding to yet again not raise rates is “ongoing excess capacity in the economy.” This is the 15th consecutive time the BOC has left rates unchanged, as all three of the bank’s core inflation measures remain below their 2% target.
While most economists don’t believe rates will increase until early-mid 2018, I believe the BOC will be succumb to raising rates earlier. One factor will be the pressure to curtail property appreciation when it becomes less localized to Vancouver/Toronto and more of an issue nationally.
Today, I would have liked to see stronger language from the Bank of Canada indicating the timing of a possible interest rate hike. Clarity on the path to higher interest rates would help guide real estate speculators, first-time buyers and industry professionals to a more educated decision making process.
The BOC is using the same strategy as the Federal Reserve in the United States, by tying interest rate hikes to inflation and employment. This strategy has appeared to have worked in the United States. The difference in Canada is that we are heading into a potential real estate crash, instead of coming out of one.
The BOC may have much more on its mind than frothy real estate prices, but it may not be long before they have no choice but to confront the elephant in the room.
An article today from Maclean’s illustrates the real estate concern and the BOC’s position nicely:
“Real estate has been Canada’s primary economic engine for years, but it looks like it could be about to blow. The Bank of Canada said that, “very strong” growth in the first quarter was partly the result of “robust” consumer spending. Those consumers are carrying record levels of debt, so it’s unlikely they can be counted on to carry the economy for much longer.
That’s why a sudden drop in home prices is so scary. Some of that spending is driven by homeowners made wealthier by the surge in house prices. If those wealth effects fade, so will consumption. Newer owners could end up with assets worth barely more—or even less—than their mortgages. Those households would be doing little discretionary spending at all. The economy would suffer, and maybe even crash.
But the Bank of Canada appears to be marginally less concerned about that now. Policy makers are in the process of writing their twice-a-year report on financial risks, so the latest housing data would have been close when the Governing Council gathered to talk about the interest-rate setting. (The next Financial Stability Report will be released in early June.) The central bank acknowledged that governments had so far failed to slow the ascent of housing prices, but that various measures had successfully reduced the number of risky borrowers entering the market. That’s important. The Bank of Canada is agnostic on prices. What it cares about is whether buyers can afford to make their loan payments, and it appears to think most of them can.”
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