When the governor of the Bank of Canada speaks, we listen!
Tiff Macklem, governor at the Bank of Canada, was speaking at a Bank of International Settlements conference recently in Mexico City.
You can watch the speech on YouTube, or download the PDF at the respective links.
My one sentence summary of this speech is …a Covid style slashing of interest rates, in the face of a Canadian recession, might not happen as some think.
Structural Change, Supply Shocks and Hard Choices:
Summary of remarks by Tiff Macklem, governor of the Bank of Canada.
- The World is Shifting: Think of the global economy like a boat. In the past, the wind (things like peace, countries working together, and a lot of young people) was helping it move forward. Now, that wind has shifted and is pushing against the boat. This means it’s harder for the economy to grow.
- More Things Are Going Wrong: It’s not just one thing, it’s a bunch of issues all at once:
- Higher interest rates, lots of government debt, and slow growth are making countries more likely to have problems.
- Wars, countries being less friendly with trade, and the world breaking up into smaller groups are also making things worse.
- New technology, like AI, is changing how businesses work, which can create uncertainty.
- Climate change is causing more extreme weather, which can hurt economies.
- Potential New Taxes from the U.S.: The United States might put new taxes (tariffs) on goods that other countries, like Canada and Mexico, sell to them. This could make those goods more expensive, and make it harder for countries to sell them. It would be like a country putting a toll on a major highway used to get goods to market, which means it would cost more to make and sell those goods.
- Central Banks Have Limited Tools: Central banks have a main tool, the interest rate, that they use to help the economy. But it’s like having one wrench to fix a whole house; it’s not enough to fix all the problems. Sometimes, when they try to fix one problem, it can make another one worse. They’re trying to balance using the interest rate to address both a weak economy and high inflation at the same time.
- Some Things Are Out Of Their Control: Central banks can’t control everything. They can’t stop wars or fix the weather. This can be frustrating and people may blame them even if it’s not their fault.
- They Need To Be Smarter And Work Together: Central banks need to learn as much as possible about the economy and how it’s changing. They need to work with other countries to solve shared problems. It’s important for central banks to understand what they can and cannot control, and not try to over use their tools to solve problems they cannot directly fix.
- Staying Independent: Central banks need to be able to make decisions without political interference. This will help them to do their best work.
- Being Confident: Even though times are tough, central banks must stay confident in their ability to keep prices stable.
- Being Honest and Open: It is important that central banks tell people what they are doing and why. This will help build public trust.
Conclusion:
Monetary response (I.E., the change of interest rates up or down) is one side of the economic steering wheel of the Canadian economy. The other side of the economic steering wheel is fiscal response (government spending).
As noted above, monetary policy is limited. However, Canada has a LONG history of adding or subtracting Mortgage policy to help steer the economic ship.
For example, changes to Mortgage qualifying rules is a lever that is routinely pulled up or down to steer the economy. A big move happened in 2018 when the “stress test” qualifying rule was implemented.
More recently, Mortgage qualifying rules are relaxing (I.E., extended amortizations for some buyers, and some Real Estate product) in an effort to help stimulate the economy.
Reading the tea leaves here …I wonder if a negative economic shock were to happen, the blunt tool of interest rate reductions would happen—but not to a covid-level extent. In addition to lower central rates, other Mortgage related policy might be created/amended to stimulate the economy?
This is one prime reason to ensure your Mortgage is adaptable, and flexible. If you’re not sure what that means, reply to my email.
I hope this is helpful!
Thank you for reading,
Chad Moore
