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Boyd Erman
Globe and Mail Update
After a year of making it easy by telling the market exactly what the Bank of Canada would do with borrowing costs by giving a commitment to keep them at emergency lows, Governor Mark Carney has rapidly switched tacks. The country’s top central banker is now confounding those who would try to predict exactly how fast interest rates will rise by refusing to give explicit guidance.
Yesterday’s quarter-point increase in the benchmark central bank rate and the accompanying statement show that the kind of transparency markets get from Mr. Carney as borrowing costs go up in coming months is going to be very different than what they have become used to over the first part of his tenure, when rates dropped to record lows and stayed there.
In this statement, Mr. Carney is being open but not predictable. He is laying out the parameters he is watching and leaving it to markets to try to figure out what that will mean for rates. It’s an education for investors and analysts, because this is the first time they have seen Mr. Carney raising borrowing costs.
“It’s going to be more fun being the central banker in this environment than being a forecaster,” said Mark Chandler, a rates strategist at RBC Dominion Securities who predicts “a whole bunch of angst” before every Bank of Canada rate announcement in coming months.
Just as the explicit commitment to keep rates low served a purpose by giving an uncertain economy some certainty, the new move to the other end of the predictability spectrum gives Mr. Carney the flexibility he needs to deal with a stop-and-go rebound in growth.
The economy posts a couple of hot quarters and inflation ticks up? Fine, a quarter point tighter it is. But then we wait and see.
This isn’t a normal recovery, so there’s no sign of the central bank’s normal language in a tightening cycle. Usually, there is wording foreshadowing a steady move higher, along the lines of “some further reduction of monetary stimulus will be required,” to quote a 2005 rate hike announcement. This time, the guidance is that “any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.”
With that, Mr. Carney has established himself as neither hawk nor dove, just a pragmatist who watches the data and the markets and reacts.
Already, there are signs that the new strategy is a success. The market is re-evaluating its belief that more rate cuts are a sure thing.
Read more at:
www.theglobeandmail.com
More about forecasting interest rates:
Economists use a variety of techniques to forecast interest rates. The most basic is to use economics and history as a guide and to make a judgement about what an appropriate level of interest rates and their future course given the state of the economy and important economic variables. Since most economists disagree on how the economy works or what economic history means, this is more difficult than it seems.
See Schools of Economic Thought.
Quantitative economic statistical techniques called “econometrics” attempts to model the economy using mathematical and statistical relationships. A comprehensive model of the economy might have hundreds of equations and many variables. The problem with these techniques is that while they might have a “high explanatory power” or be “robust” historically against “back-tested” data after the fact, they are very poor at explaining the future before the fact.
See Econometric Techniques.
The reason for this inaccuracy is simple. Interest rates reflect human behaviour which is highly complex. This complexity has been compounded by the internationalization of economies and the financial markets. The direction of Canadian and U.S. interest rates is partially set by those of other countries, particularly Germany and Japan. Even governments miss their interest rate forecasts and they have control over their countries’ monetary and fiscal policy.
Time for a mortgage checkup?
While about 80% of Canadians visit a doctor at least once a year to help ensure they remain physically healthy, the number of people who check their financial health by regularly reviewing their mortgage is far less.
Plenty can change in someone’s life in a year, never mind during the standard five-year mortgage a lot of Canadians sign up for. A career change, kids, retirement or new-found money or it could be that such a major event is on the horizon. All can affect the type of mortgage that fits just right.
Canadian consumers tend to become complacent about their mortgage payments when they could be saving a lot of money. For example, the more adverse you become to risk, the less likely a variable mortgage will be right for you. Using online tools, such as a mortgage calculator and a mortgage penalty calculator , you will know how much you can expect to pay to break your existing mortgage.
Even though banks are in the business of getting as much interest from you as they can, many will allow people to pay a lump sum of the principal on the mortgage’s anniversary and increase their monthly payments. An extra $100 a month on a standard $200,000 mortgage could save almost $18,000 in interest and shorten the amortization period by about four years.
Paying down your mortgage faster may seemingly put a crimp into your future finances if something happens and you need the money — unlike, say, putting it into a tax-free savings account or other low-risk liquid investment. But many financial institutions have a re-advance clause that allows you to retrieve some of the money spent accelerating mortgage payments, says Peter Veselinovich, vice-president of banking and mortgage operations at Winnipeg-based Investors Group.
Of course, it may become more difficult to get those funds back if there is a dramatic downward change in housing values and you haven’t built up enough equity. But that’s where understanding your entire financial situation, not just your mortgage, can help. “Most of us don’t like to think about debt, says Veselinovich. “It’s just something that somehow comes up and ends up as part of our personal balance sheet and we make payments.”
Even something simple such as making renovations could affect the type of mortgage desired. For example, topping up or refinancing an existing mortgage can pay for renovations, providing you’re comfortable with a blended interest rate. If you’re buying a new home, you may be able to port your current mortgage. Or maybe you just want to consolidate higher-interest unsecured debt into your mortgage.
A mortgage can also help you become more tax efficient if you’re thinking of investing in a business, buying a rental property or putting some money into mutual funds or the stock market. That’s because the interest paid on money borrowed on a principal property can be written off against revenue from those investments.
But the biggest reason for making changes to your mortgage mid-stream may be because it could be a lot easier to do something before your situation changes, such as going into a new venture or before retirement.
Read more: http://www.financialpost.com/
Rate hikes not ‘preordained’ in Canada
Developments in the global economy, such as the speed at which debt-laden governments are forced to cut spending and the drag that could entail for worldwide growth, means further interest-rate hikes in Canada are not “preordained,” Bank of Canada bank governor Mark Carney said Wednesday.
In remarks delivered in Charlottetown, Prince Edward Island, Carney said “considerable uncertainties” remain in the global economy, and the eventual paring back of debt among households, banks and countries “have barely begun, and will add to the variability and temper the pace” of global growth.
“The current economic outlook is neither as robust as recent data indicate nor as dire as current headlines scream,” he added.
Keeping that in mind, he said future rate hikes following the June 1 increase by 25 basis points, to 0.50 per cent, would depend on both the domestic performance as well as the “uneven” global recovery, something the central bank suggested in its June 1 statement.
“In light of the scale and volatility of these conflicting forces,” Carney said in Charlottetown, “it should be evident that no particular path for monetary policy is preordained.”
That remark was not in the interest-rate statement from June 1, and would suggest Carney is keen to keep his options open as to what the Bank of Canada would do at its next rate decision, scheduled for July 20.
In June, the central bank raised its benchmark rate based on stronger-than-expected domestic growth, with annualized GDP expansion of 6.1 per cent for the first three months of 2010. Further, inflation was above the bank’s expectations and hovering close to its preferred two per cent target.
Europe’s fiscal and financial health remains cause for concern among policy makers and investors — and on Wednesday the focus was on Spain.
The Financial Times reported Spain’s banks borrowed record amounts from the European Central Bank last month. Plus, there were rumours — later denied — that Spain was in talks with the United States, International Monetary Fund and the European Union to get access to additional funds through a line of credit.
Carney said recent financial tensions in Europe “are likely to result in higher borrowing costs and more rapid tightening of fiscal policy in advanced economies . . . . Without countervailing policies, this could lead to a more protracted recovery.”
Those policies include efforts among Group of 20 economies — whose leaders meet in Toronto next weekend — to address the unwinding of global trade imbalances to ensure sustainable and balanced growth; credible plans to get budget deficits to more manageable levels; liberalized exchange-rate policies, especially in emerging Asian economies; and financial reforms that would require banks to hold more capital and limit leverage.
“The possible responses of . . . countries to the situation are denial or conviction,” Carney said. “In the former, growing public debt will push up global interest rates (by up to 300 basis points), crowding out private investment and lowering potential growth.”
He warned of options being floated by some commentators, in particular the possibility of allowing temporarily higher inflation in order to inflate away public debt.
“To the bank, this is a siren call,” said Carney, whose central bank sets interest rates with the goal of achieving two per cent inflation.
“Central banks have worked for decades to get inflation down to levels consistent with price stability. We should not risk those hard-won gains.”
However, he said Europe has shown “conviction” in terms of its nearly $1 trillion U.S. financial stabilization plan, resulting in some key countries — Greece, Spain and Portugal — introducing tough austerity measures. Britain is to follow, shortly, as well.
“However,” Carney added, “the age of austerity carries its own risks.” He said budget-cutting plans that are too aggressive and introduced too early could create a sharp shortfall in global GDP — of about $7 trillion U.S., the central bank estimated, assuming the absence of no exchange-rate adjustment and higher domestic demand elsewhere.
Below are some of the highlights of Carney’s speech in Charlottetown:
ON BIGGEST RISK TO CANADIAN ECONOMY
“Canada is not an island … The biggest risks we face are from abroad. Those are the biggest swings.”
“I firmly believe that there is considerable opportunity outside of the U.S. and outside of Europe that needs to be exploited and should be exploited.”
ON THE CANADIAN HOUSING MARKET
“We said in our most recent projection that we expected housing market activity to slow markedly over the balance of the year … the latest (housing resale) numbers are consistent with that.”
ON FINANCIAL REFORM
“It’s extremely important that the G20 focus on the core elements of reform … capital, liquidity, the so-called Basel III package. It also matters that we get new resolution regimes, make progress on addressing ‘too big to fail’ and eliminating the moral hazard that is built up in the system. Related to that, it’s extremely important that new infrastructure is put into core markets including derivatives and funding markets so the system as a whole is more resilient.”
“The more we focus on that core agenda, the more agreement there is, the more progress we’ll make. I would say that the Basel process is very much on track.”
ON LABOR MARKET
“(There are) encouraging signs in the labor market that employment growth has returned, still a ways to go on the hours worked. There is still considerable … slack in the economy.”
ON FISCAL CHALLENGES
“The fiscal challenges that face a number of advanced economies are addressable, but they are addressable with bold action and that was part of the point of the speech. That is very much part of the point of one of the core objectives for Canada at the G20 summit.”
ON SUSTAINABLE DEBT LEVELS
“Sustainable debt to GDP is different in different economies and it is partly a function of the potential growth of the underlying economy … So all things being equal, having stronger underlying growth allows you to sustain a higher level of debt.”
ON THE U.S. CONSUMER
“The U.S. consumer has to get their balance sheet back in order and the strength we have seen in consumption spending, which has not been that robust in the United States, has been largely aided by a series of government measures … But that is going to come off over the balance of this year and into 2011, and we are going to see unaided consumption in the United States, which is going to be weaker than it has been previously.”
ON PERSONAL FINANCES
“We are getting to elevated (debt) levels and the bank has been warning on this issue and urging people to ensure that their personal finances are in order for a normal interest rate environment,”
ON PROVINCIAL FINANCES
“Provincial finances are incredibly important for our overall dynamics and the same rules apply to the provinces as to countries. They need to have credible fiscal plans to return to sustainable levels of borrowing.”
ON INFLATION OUTLOOK AND FISCAL CONSOLIDATION
“A scenario where all countries or all advanced countries tighten fiscal policy quite quickly in the face of market pressure, but other measures are not taken, that is clearly disinflationary, it clearly will slow the pace of global growth, it will have an implication for Canada, a material implication for Canada, and central banks will need to react.”
“The bank has a wide range of options and … flexibility for how we would react and maintain our ability to achieve our 2 percent inflation target. That is not our central scenario. We’re working hard to make sure that the pace of fiscal consolidation is both orderly and credible and that’s one of the objectives when we sit around the table with these countries at G20 meetings.”
June Issue of CAAMP Stats
 |
|
Bank of Canada Interest Rate
| April 20, 2010 | 0.25 % |
| June 1, 2010 | 0.50 % |
| July 20, 2010 | Next meeting date |
Source: Bank of Canada
Bank Prime Lending Rate
| April 21, 2010 | 2.25 % |
| June 2, 2010 | 2.50 % |
| July 21, 2010 | Next meeting date |
Source: Bank of Canada
Conventional Mortgage – 5 Year Rate*
| April 28, 2010 | 6.25 % |
| May 12, 2010 | 6.10 % |
| May 26, 2010 | 5.99 % |
Source: Bank of Canada
*Determinant for high ratio mortgage variable qualifying rate
US Federal Reserve Board Discount Rate
| March 16, 2010 | 0.00 % – 0.25 % |
| April 28, 2010 | 0.00 % – 0.25 % |
| June 23, 2010 | Next Meeting date |
Exchange Rate $CDN($US)
| April 29, 2010 | 0.9946 |
| May 14, 2010 | 0.9693 |
| May 31, 2010 | 0.9583 |
Source: Bank of Canada
Government of Canada Bonds
| Bond Type | April 28, 2010 | May 12, 2010 | May 26, 2010 |
| 1 year Treasury Bill | 1.29% | 1.26% | 1.02% |
| 3 year Benchmark
Bond Yield |
2.49% | 2.38% | 2.00% |
| 5 year Benchmark
Bond Yield |
3.09% | 2.96% | 2.55% |
| 10 year Benchmark
Bond Yield |
3.66% | 3.59% | 3.25% |
Source: Bank of Canada
Total New Housing Starts (Seasonally adjusted and annualized)
| Province | February
2010 |
February
2009 |
March
2010 |
March
2009 |
April
2010 |
April
2009 |
| Newfoundland/Labrador | 5,300 | 3,200 | 6,000 | 3,300 | 3,100 | 2,800 |
| PEI | 300 | 500 | 300 | 400 | 400 | 500 |
| Nova Scotia | 6,300 | 4,700 | 3,900 | 3,800 | 3,600 | 2,500 |
| New Brunswick | 2,400 | 3,200 | 3,700 | 3,400 | 3,600 | 4,200 |
| Quebec | 47,300 | 36,900 | 55,300 | 43,600 | 53,700 | 41,100 |
| Ontario | 73,300 | 47,100 | 63,200 | 62,600 | 64,700 | 36,300 |
| Manitoba | 5,400 | 3,700 | 3,800 | 3,500 | 3,400 | 3,100 |
| Saskatchewan | 5,000 | 2,300 | 4,000 | 2,100 | 4,200 | 2,900 |
| Alberta | 28,300 | 12,600 | 34,100 | 11,900 | 35,700 | 12,400 |
| British Columbia | 30,200 | 14,200 | 24,900 | 11,900 | 28,300 | 11,700 |
| CANADA | 203,800 | 128,400 | 199,200 | 146,500 | 200,700 | 117,600 |
Source: CMHC Housing Now – May 2010 and May 2009. This seasonally adjusted data goes through stages of revision at different times of the the year.
Average MLS Resale Price for Local Markets
| City | April 2009 | April 2010 |
| Halifax | $245,412 | $247,168 |
| Saint John | $166,172 | $166,836 |
| Quebec | $206,739 | $232,188 |
| Montreal | $267,236 | $293,393 |
| Ottawa | $298,593 | $333,854 |
| Toronto | $385,641 | $437,566 |
| Hamilton/Burlington | $286,191 | $317,909 |
| Winnipeg | $212,541 | $236,574 |
| Saskatoon | $276,455 | $299,214 |
| Calgary | $371,995 | $395,847 |
| Edmonton | $312,127 | $339,172 |
| Vancouver | $565,003 | $673,579 |
| Victoria | $455,143 | $518,536 |
Source: Canadian Real Estate Association
Housing Affordability Index
