May 24, 2017

No Change – or Mention of Home Capital – in Bank of Canada May Announcement

The Bank of Canada (BoC) stuck with status quo in its May announcement, opting to leave its trend setting Overnight Lending Rate at ½ per cent. The rate, which dictates variable borrowing costs for consumer banking products, has stayed put since July 2015 – and likely will until at least 2018, despite evidence of an improving Canadian economy. The Bank Rate is ¾ per cent, and the Deposit Rate is ¼ per cent, accordingly.

Inflation Remains Below Target

The central bank’s statement indicates the three measures of core inflation, which it bases its decision on, are still too low to warrant any change to interest rates. While there have been improvements in the energy sector and job market, dropping food prices and poor wage growth leave excess capacity in the economy.

However, it paints the cheeriest picture in recent memory regarding the oil industry, stating: “The Canadian economy’s adjustment to lower oil prices is largely complete and recent economic data have been encouraging, including indictors of business investment.” It has forecasted that projected output will have expanded at 3.8 per cent in the first quarter of the year, building on 3.2 per cent realized in Q4 of 2016.

Related Read: No Change for April Bank of Canada Rate Despite Stronger Economy

The Housing Market: Too Big to Fail?

It also acknowledged that “consumer spending and the housing sector continue to be robust on the back of an improving labour market, and these are more broadly based across regions.” – and this is likely the key to its reluctance to hike rates prematurely.

The reality is the housing market is a main driver of the economy in the absence of oil. Given a large chunk of buying activity is fueled by the record low interest rate environment enjoyed by borrowers over the last several years, the BoC would be remiss to increase rates while indebted Canadian households are so vulnerable to interest rate shock.

In fact, according to a poll out this week from Manulife, as many as three quarters of Canadians say they would have difficulty paying their mortgage should their payments rise by 10 per cent – a scenario that could be prompted by as much as a 1 per cent BoC increase. Said ManuLife President and CEO Rick Lunny, “What these people don’t realize is that we’re at record low interest rates today… When you put it into that context, they’re not really prepared for what is inevitable. Sooner or later, interest rates are going to rise.”

U.S. Uncertainty and Global Growth

On a global risk scale, the BoC indicates there are still too many uncertainties that could harm future growth – for example, proposed changes to American corporate tax brackets and a potential renegotiation of the North American Free Trade Act. However, global growth is occurring at the pace it predicted in its April Monetary Policy Report. “The global economy continues to gain traction and recent developments reinforce the Bank’s view that growth will gradually strengthen and broaden over the projection horizon,” the BoC states. “As anticipated, growth in the United States during the first quarter was weak, reflecting mostly temporary factors. Recent data point to a rebound in the second quarter. The uncertainties outlined in the April MPR continue to cloud the global and Canadian outlooks.”

No Mention of Home Capital

The BoC made no reference whatsoever to the recent issues plaguing alternative mortgage lender Home Capital and the resulting fears of an impending subprime mortgage crisis. While it’s not in the Bank’s motis operandi to comment on the actions of specific consumer lenders, there have been calls for it to acknowledge of the lender’s downturn, and perhaps provide insight for nervous investors. Most notable were comments from CIBC Chief Economist Benjamin Tal earlier this month that “Somebody has to stand for Canada, and that somebody must be the central bank.” However, BoC Governor Stephen Poloz has directly avoided comment, staying mum even when under journalist pressure.

However, it appears the Ontario Securities Commission’s investigation into Home Capital’s practices, or speculated bailout should it continue to bleed cash, aren’t registering as economic risks from the BoC’s perspective; saying nothing could be an indication that markets – and borrowers – have nothing to fear.