Carney and the Rate Game
Higher rates have been on Bank of Canada Governor Mark Carney’s mind this week. Carey signalled the chance of tighter policy on three separate occasions this week, even after keeping the key lending rate at 1.0 percent. however, Carney’s insistance that rates are on their way up sets Canada apart from other central banks that continue to look for ways to stimulate their economics amid the European debt crisis, a struggling U.S. market, and disappointing growth in China.
According to official transcripts from Carney’s interview with the BBC in London on Wednesday, the Bank of Canada feels that Canada is “in a very different place than the major crisis economies, such as the U.K.”. According to Carney, Canada’s economy is almost back to full capacity, “the labour market’s been growing, we’re growing above – we had been growing above trend, and the extent to which we continue to grow above trend, we may withdraw some of the monetary policy stimulus.”
Carney appeared on both the BBC and CTV on Wednesday, during which he discussed the positive changes in Canada’s housing market and economy. During his time on CTV, Carney suggested that months of dire warnings concerning household debt was finally starting to pay off. The most recent numbers show that household debt is slowing and hot markets in Toronto and Vancouver are beginning to cool.
The Rate Game
Even so, key market players believe that Carney’s next move will be to raise interest rates. The question is when. The median forecast of primary dealers surveyed by Reuters last month was for a first quarter-point increase… but not until the third quater of 2013.
Sal Guatieri, senior economist at BMO Capital Markets in Toronto, feels that Carney will need to see signs of further economic weakness from Europe or Canada prior to abandoning a rate increase. Another potential trigger would be a large shift in Canada’s inflation outlook.
Canada vs. The World
Dangerous slowdowns in major economic markets like China continue to create a ripple effect in global markets. However, Canada’s relatively strong fundamentals have helped our economy stay afloat. Just last friday the loonie hit parity with the U.S. dollar for the first time since May.
The Bank of Canada trimmed its economic growth forecasts to 2.1 percent this year, down from the previous estimate of 2.4 percent. Growth was also cut to 2.3 percent in 2013, down from 2.4 percent. What’s more, Canada’s benchmark 10-year bond yield dropped to a record low on Monday amid speculation that the U.S. economy is slowing.
How Will This Impact Housing?
Home prices could start falling soon thanks to record homeownership levels in Canada and a slowing housing market. A recent Bank of Nova Scotia report suggests that prices could fall by 10 percent over the next two to three years. This following news that Canada’s homeownership level has hit a record 70 percent. By comparison, in 1961 homeownership was at 60 percent. At the turn of the millenium it was almost to 68 percent.
The biggest correction will take place in Vancouver, Canada’s most expensive market. Shocks will also be felt in Toronto’s oversized condo market. On the other hand, areas like Calgary and Saskatoon may outperfom during this transitional phase as best rate mortgage holders relocate in search of resource development jobs.