Chad Moore Calgary Mortgage Broker

The Bank of Canada released the July Monetary Policy Report That Outlines Canada’s Monetary and Economic Outlook. This Is A Breakdown of That Report.

Let’s start, right out of the gate, with this quote from Tiff Macklem, Governor of the Bank of Canada, from the opening statement of the Monetary Policy Report (MPR) press conference …

As the economy moves from reopening to recuperation, it will continue to require extraordinary monetary policy support. The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In addition, to reinforce this commitment and keep interest rates low across the yield curve, the Bank is continuing its large-scale asset purchase program at a pace of at least $5 billion per week of Government of Canada bonds. This QE program is making borrowing more affordable for households and businesses and will continue until the recovery is well underway. To support the recovery and achieve the inflation objective, the Bank is prepared to provide further monetary stimulus as needed.

My title “lower for longer” stems from this forward guidance on Canada’s interest rate policy. In the last five and a half years of closely watching the Bank of Canada (BoC) navigate the economy, I’ve never experienced such outright clarity on the path ahead.

Essentially the BoC is green-lighting Canadians (people and businesses) to borrow and not worry about high interest rates – for a while.

The BoC is planning to monitor inflation, keep the policy rate low and suppress the yield curve – all in a effort to keep interest rates lower for longer. Let’s take a closer look at this together …

Inflation Outlook:

The BoC is noting people’s spending has changed as a result of the pandemic and this is changing inflationary measures in Canada.

Abrupt, large shifts in consumer spending occurred with the onset of the pandemic. These shifts imply that the consumer price index (CPI), which is a fixed basket of goods and services, may not reflect the actual level of inflation Canadians experienced during the containment period.

In light of this change, the BoC has created a new index to help account for the change in spending of Canadians. The Bank and Statistics Canada have created the “Analytic price index”.

New monthly weights are calculated using anonymized aggregated payment data, Statistics Canada’s monthly retail trade survey, and transaction data from Canadian grocery retailers as well as subject matter expertise.

The new adjusted measure of Canada’s inflation doesn’t fall far from the current measure of inflation. My question to you is, where are you seeing things in your life become more expensive? Where are you seeing inflationary pressure?

It is possible you’ve heard lower income workers have been disproportionally affected by the pandemic in an effort to preserve public health. Other households, with income earners that can adjust easier to working remotely, have been able to save more simply by spending less. This might create a scenario of some pent up consumer demand? Either way, spending does effect Canada’s inflation numbers.

I’ve jokingly been thanking my friends and family who have made purchases… our economy needs people spending money. Consumer spending is a large part of our national Gross Domestic Product (GDP). Thank your friends who buy new jeans, vehicles, or other household items ;-).

The forward guidance from the Bank of Canada is “lower for longer” until Canada’s 2% inflation target is consistently achieved AND the slack in the economy has significantly shrunk. “Slack” refers to the current economic output relative to the potential economic output. Stephen Poloz use to refer to this as “bringing the economy home” (October 2017 blog post link <==). With the data on hand, subject to change, these targets are not planned to be achieved until 2022/23.

Quantitative Easing (QE):

You drink coffee, right? I do. I could obviously function without coffee, but I get that extra kick in the morning from my coffee. I typically don’t have too much of a caffeine dip in the afternoon so I don’t drink coffee past the morning.

Our economy has recently started drinking coffee, and now we need it to function. If the coffee is removed, things would not end well for us.

I’m talking about Quantitative Easing (QE) as a shot of coffee into our economy (maybe more like adrenalin?). The Bank of Canada (BoC) is pumping liquidity into our economy like it has never done before.

When central bankers enter markets, they are artificially manipulated. We are seeing Governments across the Globe do this. I’m not saying this level of QE is good-or-bad. I am noting, our capitalist economy is not really a free market with this level of economic steering …maybe this is just “normal” and has been happening long before I was alive/aware of macro-economics?

Here is a graph of the Bank of Canada’s asset purchases (QE) recently:

Back to the opening quote of my post …

This level of asset purchase is just the beginning. The BoC is happy to take on more and more debt, purchase more assets and intentionally control the market to create a level of low interest rates for longer (forever?).

Below is a graph of Canada’s asset purchases (QE) relative to other Countries.

Here’s how this liquidity/asset purchases tricked into the Mortgage market ..

When the pandemic first started to take grip, the bond market tanked and the BoC was dropping interest rates, fast. Then credit markets started to see the economic headwinds and fixed interest rates rates started to rise.

Despite the drop of interest rates by the Bank of Canada, variable Mortgage rates ROSE HIGHER because the relationship to the Prime rate was increasing. This all happened relatively quickly.

Once credit markets started to price in the risk, and crunch liquidity from entering the market, the BoC rolled out various purchase programs (March 2020 blog post link <==). Now lenders have access to capital to lend, with favourable conditions, and we have our ultra low interest rates of today!

Honestly, it’s almost like Tiff Macklem, BoC Governor is cheerleading (begging?) Canadian people and business to borrow money. Just keep borrowing!! Economic expansions and contractions typically follow the short term debt cycle. We need to stimulate growth, or stave off negative growth, and borrowing helps that initiative.

Again, see the first quote …In fact, Tiff said further stimulus is prepped and ready to roll!

Conclusion:

I’m learning the Americans are c-r-a-z-y about the stock market. I’m told it’s a big focus in business and amongst people in America. I’ve often heard the President refer to the stock market as a barometer of his popularity.

I heard on MSNBC news, and from other personal sources, that various income bracket levels in the U.S have all seen a rise in retail investment in the stock market. It’s likely people are taking their stimulus checks and throwing it into the market. Again, it seems they love their market.

For Canadians, our housing market seems to be a bigger focus to us …and to our Governing bodies. There has been policy rolled out to stem the red hot rise of property values in Vancouver and Toronto. One such recent policy event was the Mortgage B-20 “stress test”. Remember that hoopla in January 2018? I do. (October 2017 blog post link <==)

It seems like the policy now is to help prop up Canada’s housing market by fueling credit expansion through ultra low interest rates to encourage borrowing (see comments on market manipulation above).

Longer term, I think it is possible inflation will show up in our lives through the appreciation of assets (stocks, property values, precious metals) which will reward the people who own these assets, and continue to distance people who do not. Have’s and have not’s.

A large rise of interest rates in Canada would be crushing to our housing market and broad economy. So for now, lower for longer, borrow and spend! We all have a duty to help each other through this tough time :-).

Do you have a Mortgage question or need? If so, reach out to me via phone, email or application. See “contact” tab.

Talk soon,
Chad Moore