Chad Moore Calgary Mortgage Broker

Hey Everyone,

Two updates for you on recent data released by the Bank of Canada (BoC) and Statistics Canada.

1.  Bank of Canada press release on they dynamic of household debt. Here.
2. The latest Statistics Canada jobs data. Here.

Bank Of Canada Press Release:

65% of Canada’s Gross Domestic Product (GDP. Our National economic output) is based on consumer spending.  Entering an era of increasing interest rates will inevitably put the question to Canadian consumers: keep spending or pay down debt?

With historically low interest rates, Canadians have been spending.  However, with three Bank of Canada interest rate hikes since July 2017 the data is reporting more consumers are choosing to pay down debt.

Here are some highlights from the Governor of the Bank of Canada, Stephen Poloz, speech on May 1st 2018:

Fiscal & Monetary Stimulus: Government debt or household debt; both create vulnerabilities. 

• If fiscal policy takes the lead on stimulating the economy, this results to the build up of Government debt.
• If monetary policy takes the lead, this leads to a build up of household debt.  Policy makers need to consider the consequences of the mix of fiscal and monetary policy.
• Canadians have taken advantage of low interest rate Mortgage debt, but have kept their debt servicing ratios at about historical norms (going back to the 90’s).
• Home Equity Lines of Credit (HELOC’s) have been on the rise.  Accessing home equity has never been cheaper, due to low interest rates, and allowed Canadian’s to increase consumer spending.  This phenomenon is called the “wealth effect” which goes hand-in-hand with increasing property values.
• About 8% of indebted Canadian households owe 350% more than their gross income.  This group is the most exposed to increasing interest rates and is being watched very closely for vulnerabilities to our economy and financial system.

High Debt Levels And Monetary Policy:

• Significant issue now is gauging how sensitive the Canadian economy is to increasing interest rates.
• Our economy will require higher interest rates in the future to meet the BoC’s inflation target of 2%.
• Considering higher debt levels in our economy, the BoC expects any monetary policy tightening (higher rates) will have a more significant impact on the economy than it has in previous years.
• The three rate hikes, since July 2017, have yet to work their way through our economy to fully reveal how sensitively our economy has reacted.

Where Are Interest Rates Headed:

• Canada’s central interest rate is still considered stimulative to the economy.  At some unobservable higher interest rate, the economy will be in a neutral stat, neither stimulating or dampening the economy.  This neutral interest rate is also a moving target, based on international and macro economic changes.
• The BoC being aware of this neutral rate is important for three reasons:
  1. The further current rates are from this neutral interest rate, the more stimulative today’s policy rate is.
  2. Because the neutral interest rate does change, any interest rate movement by the Bank of Canada can be more or less stimulative.
  3. If the neutral interest rates falls fare enough, it might be difficult for the Central Bank to provide enough stimulus in the event of a serious economic downturn.
  4. The BoC estimates Canada’s neutral interest rate falls somewhere between 2.50% – 3.50%.  Today’s Central Bank rate is 1.25%.
• Several factors are retraining Canada’s economy, despite relative balance of supply and demand:
  1. Mortgage qualifying rule changes.
  2. Ongoing uncertainty on US trade policy.
  3. Renegotiation of NAFTA.
  4. Range of competitive challenges effecting exports.
• These factors will not last forever, and a natural rise in interest rates will occur.
• Another benchmark for measuring monetary stimulus is the real rate of interest, the BoC’s policy interest rate, less the rate of inflation.  Today, the inflation adjusted policy rate is -0.75%.  As restraints on our economy diminish, a inflation adjusted policy rate below zero is not required.

Managing Risks:

• Raising rates to quickly will choke off growth and cause the economy to fall short of it’s 2% inflation target.
• The opposite is true, leave rates too low and the economy could overshoot this same inflation target.  Also, moving too slowly could mean more accumulation of debt, increasing future vulnerabilities.

Stats Canada Jobs Data Highlights:

Class of worker:

• Self employed people had 2.1% growth in jobs year over year.
• Employee job growth is up 1.4% year over year.

Public/Private sector job growth:

• Public jobs grew 2% year over year.
• Private jobs grew 1.2% year over year.

Conclusion:

I think it’s prudent to think we are in an era of increasing interest rates, through the Bank of Canada.  Staying close to incoming Canadian data and communication from the BoC will provide insight of the near to medium term future of interest rate pressure.

Keenly watching employment data, inflation numbers, our dollar and the same out of the US is helpful to anticipate future rate hikes.  Continue to visit my blog and read my emails for additional info/thoughts.

There is a growing gap between fixed and variable interest rates that I would like to write about in future blog posts.  Coming soon!

Thank you for reading,

Chad Moore