This morning, Bank of Canada (BoC) Governor, Stephen Poloz, announced its overnight lending rate would remain at 1.00% for yet another six weeks. While this announcement does not come as a surprise, it does allow variable rate mortgage holders whose mortgage rates are attached to Prime rate to breath a sigh of relief – at least, for now.
In the past two weeks, two different agencies – Fitch Ratings and Morningstar – announced concerns that the Canadian housing market is overvalued by as much as 20-30% respectively. Fitch believes Canada’s household debt levels make “the market more susceptible to market stresses like unemployment or interest rate increases” and fears a 20% correction is in our future. Morningstar thinks that number will be closer to 30%, and notes that interest rates have fallen for the past 30 years, which has been the biggest driver in housing affordability across the country.
If there was a Bank of Canada interest rate hike (and they are expected to in 2015), there’s no doubt it would affect housing affordability. But the BoC did not step in and increase its overnight lending rate today, to accommodate the above housing market concerns. Instead, they said this in their announcement:
“Household imbalances continue to evolve constructively and recent data are broadly consistent with a soft landing in Canada’s housing market.”
It later added: “The risks associated with household imbalances, while evolving in a constructive way, are still elevated.”
So, the situation is on their radar.
Good news to come out of today’s announcement is that core inflation is moving up; it remains below the 2.00% target, but has gone up due to higher energy prices, exchange rate pass-through and other sector-specific shocks. The BoC expects inflation to fluctuate around 2.00% for the next two years, even with the downgrade to the global outlook and weaker economic activity in Canada.
In the future, if the BoC doesn’t increase its overnight lending rate to accommodate housing market concerns, some think Finance Minister Joe Oliver will have to step in. While he’s been fairly hands-off about the state of the residential mortgage market since being appointed in March, he’s always agreed that a soft landing may be in our future. Fitch think it’s time for Oliver to engineer it himself and slow down borrowing on homes. Will there be new, new, new mortgage rules and regulations in our future? Only time – and future interest rate announcements – will tell.
The next Bank of Canada interest rate announcement is scheduled for September 3, 2014.