Last week the Bank of Canada made monetary policy announcement that outlines the likely path to Mortgage (fixed & variable) interest rates.
Let’s break this down into several sections for you …
- Quantitative Easing (QE) program update.
- Rate hike timeline.
- International influence
Quantitative Easing (QE) Program Update:
In the early days of the COVID 19 pandemic, monetary and fiscal policy came to the rescue – deservedly so – for many Canadians (and our economy). Only with the benefit of hindsight will we be able to judge these decisions, but at the time, our leaders did what they thought was best.
Spring of 2020 I was writing articles for you about the roll out of various monetary and fiscal policy measures came into effect (link, link, link, link).
Today, Canada’s Quantitative Easing (QE – bond purchase program) is ongoing (but with more forward guidance). This program helps provide stability, credit, liquidity – ultimately designed to lower borrowing costs for businesses and households.
The Bank of Canada has updated the timeline and direction of QE. This is important forward guidance for those interested in anticipating Mortgage interest rates.
The Bank of Canada has been tapering the QE program from $5B of bond purchases per week, down to $2B of bond purchases per week. The plan is to continue tapering as our economic recovery progresses. From Tiff Macklem, Governor of the Bank of Canada, “As the recovery progresses, we are moving closer to a time when continuing to add stimulus through QE will no longer be necessary.”
Tiff goes on to say, “Decisions regarding future adjustments to the pace of net bond purchases will be guided by Governing Council’s ongoing assessment of the strength and durability of the recovery.”
I think assessing the durability of Canada’s economic recovery will be interesting waters to navigate. In the Bank of Canada’s July Monetary Report, GDP was expected to climb (2nd image below). Last week, Canada’s Gross Domestic Product (GDP) numbers were released from Stats Canada and dropped unexpectedly.
Now we have a shrinking economy, with high inflation (3.7%). I wrote you an article (link) about why this scenario is a absolute nightmare for policy makers #stagflation.
(below from Bank of Canada’s July Monetary Policy Report)
Rate Hike Timeline
QE tapering and the rate hike timeline are dependent on Canada’s economic recovery. Here are some points, from the Bank of Canada (link), relating to our current recovery:
- Jobs have rebounded, but the recovery of the labour market is still uneven.
Our economy seems depressionary in some employment verticals (tourism, service) and to be booming in others (Real Estate). - Growth from April through June was weaker than expected.
See comments and graphs above. - Consumption, business investment and government spending have continued to fuel the recovery. At the same time, housing activity appears to be moderating.
Peak home sales activity, in Calgary, and the rest of Canada, happened in March/April 2021. See my latest article on Calgary’s market (link). - Supply chain bottlenecks have weighed on manufacturing and exports.
One example of this is the “chip shortage” that has played into supply shortages of new vehicles.
The Bank of Canada is watching our markets and economy as a whole. As data becomes available, changes will be made. The general path to change is this:
- Asset purchase reduction. The Bank of Canada continues to reduce asset purchases (bond purchase program).
- Reinvestment phase. As current Government bonds mature, the Bank of Canada will reinvest in these bonds. This will not expand the BoC’s balance sheet like asset purchases do, but will provide some stability and stimulus to the economy.
- Rate hikes. Eventually, based on data, the economy will be at a place to absorb interest rate hikes. This essentially removes stimulus from the economy.
Canadian economic “happenings” influence Bank of Canada policy decisions. What might prove to be even more influencial to BoC policy choices are policy decisions from international central banks; particularly the European Central Bank and U.S. Federal Reserve.
International Influence
By and large, I think Canada is a net importer of monetary policy. I think our national economy can’t really buck the trend of global monetary policy, specifically from the European Central Bank (ECB) or the U.S. Federal Reserve. Each of these central banks released updates recently.
ECB Update:
Rates:
The European Central Bank (ECB) has a similar 2% inflation target mandate as Canada, and the U.S. Each central bank wants to see inflation stabilize at 2%, but are OK with “transitory” inflation running above the target in the short term (link).
“In support of its symmetric two per cent inflation target and in line with its monetary policy strategy, the Governing Council expects the key ECB interest rates to remain at their present or lower levels until it sees inflation reaching two per cent well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at two per cent over the medium term. This may also imply a transitory period in which inflation is moderately above target.”
Bond Purchase Program:
The ECB also plans to continue with 20B of asset purchases per week to keep markets liquid and accommodative financial conditions. Shortly after this program concludes seems to signal the start of rising interest rates. In the quote below, 20B of assets purchases has no end in sight (link)?
“Net purchases under the APP (asset purchase program) will continue at a monthly pace of €20 billion. The Governing Council continues to expect monthly net asset purchases under the APP to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.
The Governing Council also intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.“
The liquidity spigots are wide open in Europe, with no real plan to pull back.
U.S. Federal Reserve
The U.S. Fed continues with the full force of accomodative monetary policy in the wake of the ongoing pandemic. Eventually, monetary policy will throttle back, which is referred to as “tapering”. Tapering could begin as early as this year, with sufficient and economic data present.
This is a quote (link) from Federal Reserve Chairman, Jerome Powell from August 27th, 2021, “We have said that we would continue our asset purchases at the current pace until we see substantial further progress toward our maximum employment and price stability goals, measured since last December, when we first articulated this guidance. My view is that the “substantial further progress” test has been met for inflation. There has also been clear progress toward maximum employment. At the FOMC’s recent July meeting, I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year. The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the Delta variant. We will be carefully assessing incoming data and the evolving risks. Even after our asset purchases end, our elevated holdings of longer-term securities will continue to support accommodative financial conditions.”
As the U.S. Fed tapers asset purchases, that is not directly reflective of a timeline to raise interest rates. The U.S. Fed is looking to achieve maximum employment and a average of 2% inflation. Essentially, the U.S. Fed is ok with inflation running hot for a period of time, as long as the direction of inflation is consistent and averaging 2%.
Quote from U.S. Fed chairman Jerome Powell, “The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test. We have said that we will continue to hold the target range for the federal funds rate at its current level until the economy reaches conditions consistent with maximum employment, and inflation has reached 2 percent and is on track to moderately exceed 2 percent for some time. We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis.”
Conclusion:
Central banks have a plan. Like any plan, future decisions are based on circumstance/data at the time. I think we all agree, the only certainty in the future is uncertainty.
I’m hearing a lot of conflicting thoughts about how various economic circumstances could unfold, such as: inflation, tapering of bond purchase programs, bond yields, fiscal stimulus (continued response of pandemic support), return of supply chains etc.
The Bank of Canada is continuing to monitor homeland data, but I think the influence of other international monetary policy, and how that influences Canadian monetary policy, is understated. I can’t really imagine Tiff Macklem saying to the media, “we follow the ECB and the U.S. Federal Reserve.”
Like anyone of us, especially when making a decision to purchase a home, I assess my current position, make a reasonable prediction of the future, and move forward.
I’m committed to keeping you updated on major changes to economic data that influence fixed and variable interest rates. If you found this article valuable, please share it. Let me know of any Mortgage or Real Estate plans you have so we can work together.
Talk soon,
Chad Moore
