The popularity of fixed mortgage rates in 2019 was unmistakable. But the Bank of Canada may have moved the needle for variable rates with its comments Wednesday.
Below are the week’s top 10 statements from the BoC, all of which will be of interest to any serious rate watcher.
The below quotes come from Bank of Canada Governor Stephen Poloz and Senior Deputy Governor Carolyn Wilkins. Our take in italics.
- The BoC is sitting on the fence but leaning slightly towards a cut. The market now expects a 26% chance of a rate cut on March 4 and at least one full cut by October. (Source: Bloomberg)
- “Most central bank governors would only tell us that the door is open for an interest rate cut – as Bank of Canada Governor Stephen Poloz did on Wednesday – if they wanted to signal that a cut was on the way,” wrote Capital Economics’ Stephen Brown.
- Poloz suggested he wouldn’t make an “insurance” cut. The BoC has considered them, as he admitted in October, but he’s since stated he wants to see clear evidence of a weakening inflation outlook before pulling the trigger.
- On the other hand, what the BoC admits and what it does are two different things. It knows well that “failure to be proactive would end up forcing the BOC to lower rates even more over time,” as Bloomberg News wrote this week.
- “Household consumption, which accounts for about 56% of gross domestic product, has been growing at the slowest pace outside recession since at least the early 1960s,” notes Bloomberg News.
- Barring an all-out crisis, if the BoC revises its growth forecasts lower 1-2 more times, and there’s no rebound in economic activity in Q1, and core inflation breaks below 2%, a rate cut would likely be in play.
- When the BoC views the risk of cutting rates as roughly equivalent to the risk of standing pat, the country’s high debt loads and home prices are a tie breaker, discouraging the BoC from easing. But make no mistake, when unemployment starts shooting north of 6% and inflation dives below 2%, rate cuts will be on the table—regardless of what housing’s doing.
- The BoC expects “a pickup in growth in the first quarter and then stronger [growth] in the second quarter.” If that doesn’t play out, look out. It could pull down the Bank’s inflation projections and warrant more serious consideration of rate cuts.
- More than a few economists doubt that NAFTA 2.0 will generate a significant boost to GDP. If we’re lucky, it’ll be a wash for trade.
- Fundamentals (rates, tight supply, immigration, strong employment, etc.) are all revving the engine for housing. Realtors we talk to in places like the GTA and GVA expect a vigorous spring market. Surely the BoC wouldn’t downplay that because it has a rate cut bias?
- Canada’s invisible hand is keeping the stress test rate inflated at 5.19%, making it harder to get approved for a mortgage. Until that rate starts dropping, the Bank of Canada has more to fear by not easing in the face of disinflation, than by cutting and boosting housing “vulnerabilities.”
- If it wasn’t clear enough already, mortgage risk is not a good enough reason to delay a rate cut if inflation risks undershooting the BoC’s target.
- The Bank of Canada seems open to stress test changes and its opinion is weighed heavily by regulators. What those tweaks may be and when they might happen is anyone’s guess.
(BoC quote source: National Post)