18 Jan

Bank of Canada Raises Rates Cautiously

General

Posted by: John Panagakos

As was widely expected, the Bank of Canada announced another quarter-point interest rate increase this morning, saying that more hikes are ahead. According to Governor Stephen Poloz, the “big cloud” over the Canadian economy is the uncertainty associated with NAFTA and he cautioned that it would be some time before interest rates return to normal levels as some monetary stimulus remains warranted.

The Bank of Canada increased the target overnight interest rate to 1.25%, its highest level since the global financial crisis marking the third rate hike since July. The move comes in the wake of unexpected labour market tightening and strong business confidence and investment. The Canadian economy is bumping up against capacity constraints as the jobless rate has fallen to its lowest level in more than 40 years.

Inflation is just shy of the 2.0% target level and wage rates are rising, albeit at a relatively moderate pace.

Exports have been weaker than expected. NAFTA uncertainty is “weighing increasingly” on Canada’s economic outlook as cross-border shifts in auto production are already beginning.

Consumption and housing will slow due to higher interest rates and new mortgage guidelines. According to today’s Monetary Policy Report (MPR), “growth of household credit has slowed somewhat since the first half of 2017, even though some households may have pulled forward borrowing in anticipation of the new B-20 guidelines related to mortgage underwriting from the Office of the Superintendent of Financial Institutions (OSFI). This slowing is consistent with higher borrowing costs due to the two policy rate increases in 2017.” Home sales increased considerably in the fourth quarter in advance of the tightening OSFI mortgage rules implemented beginning this year.

The MPR goes on to comment that “residential investment is now expected to be roughly flat over the two-year projection horizon. The rate of new household formation is anticipated to support a solid level of housing activity, particularly in the Greater Toronto Area, where the supply of new housing units has not kept pace with demand. However, interest rate increases, as well as macroprudential and other housing policy measures, are expected to weigh on growth in residential investment, since some prospective homebuyers may take on smaller mortgages or delay purchases.”

With higher interest rates, debt-service costs will rise, thus dampening consumption growth, particularly of durable goods, which have been a significant driver of spending in recent quarters. “Elevated levels of household debt are likely to amplify the impact of higher interest rates on consumption, since increased debt-service costs are more likely to constrain some borrowers, forcing them to moderate their expenditures.”

While global oil price benchmarks have risen in the past quarter or so, Canadian oil prices have been flat. Transportation constraints facing Canadian oil producers have held down the price of Western Canada Select oil, leaving it just below October levels. Canadian oil producers have trouble getting oil to the U.S. market, and with no East-West pipelines, they cannot export oil to markets outside of the U.S. This has been a long-standing negative for the Canadian economy.
Markets have been expecting three rate hikes this year, taking the overnight rate to 1.75% by yearend. This level is considerably below the Bank of Canada’s estimate of the so-called neutral overnight rate, which is defined as “the rate consistent with output at its potential level (approximately 1.6%) and inflation equal to the 2.0% target.” For Canada, the neutral benchmark policy rate is estimated to be between 2 .5% and 3 .5%. The need for continued monetary accommodation at full capacity suggests policymakers aren’t anticipating a return to neutral anytime soon.

The Bank’s revised forecasts for inflation and real GDP growth are in the following table. The numbers in parentheses are from the projection in the October Monetary Policy Report. Today’s MPR forecasts that inflation will edge upward while economic growth slows from the rapid 2017 pace (3.0%) to levels more consistent with long-term potential (1.7% to 1.8%).

The Bank of Canada’s future actions will continue to be data dependent. The next policy announcement is on March 7.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

 

3 Jan

Making 2018 Your Turnaround Year!!

Latest News

Posted by: John Panagakos

It’s become a bit of a cliché to talk about resolutions at the start of the New Year. You’re going to be inundated with pitches to exercise more, “eat right” or pick up a new hobby. These resolutions start out with the best of intentions but ultimately most of us can’t manage to keep them. Within a few days or weeks, we’re back to our old habits. Perhaps only a psychiatrist knows why we can’t keep our resolutions. While giving up the sweets might seem like an impossible task, getting into some good financial habits at the start of the year is easier than you think. And there is no better time to look at what you might be doing right and perhaps wrong when it comes to your finances and make a change to see a more prosperous 2018. These are by no means brand new ideas but rather tried and tested concepts worth considering.

 

  • Set and write down your financial goals for the year. Having these goals written down will help you stay on task. Review them as often as you need to.
  • Review your household budget. Sometimes we get caught off guard by just how much money we’re spending every month. Take a good look at those expenses, and if there are a few items you can cut, go for it. Everyone has something they spend their money on they think they can’t live without. But being fiscally responsible takes some discipline.
  • Pay down your credit cards. Credit can be a great thing. It helps get you out of a bind when you need it, or help with an important purchase you can pay for later. But having too much credit-card debt can hurt in the long run. Try to pay off as much of your credit-card debt as you can. Every little bit helps.
  • Plan for an annual review day. That means sitting down with your accountant, financial planner, even your mortgage broker to see where you are with your finances. Can you pay a little more for your mortgage? Is there a new government policy or an investment that you haven’t heard about from which you could benefit? Financial professionals are up to speed on all the latest options and can advise you accordingly.
  • Be realistic. We’re constantly squeezed between the things we want to buy and the bills we have to pay. You’re not likely going to go from zero to hero financially in a month, but taking a few easy steps, making good choices and chipping away at your debt will start to pay off. 

     

These are just some basic tips to follow. With so many experts and places to look for financial advice, there’s really no excuse not to use the turn of the calendar to get started.