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Now that the Bank of Canada has scratched the interest rate itch, get ready for more

7/24/2017 | Posted in Mortgage Interest Rates by Michael Antczak | Back to Main Blog Page

Stephen Poloz Bank of Canada

It could be likened to the so-called “seven-year itch.”

Many of the world’s central bankers, including in Canada, had been stubbornly tied to low-for-longer interest-rate regimes following the recession in a concerted push to stimulate spending and investment.

Some policy makers turned darn right negative in an effort to repair the damage from the global collapse, plowing trillions of dollars into their financial systems when more traditional monetary efforts provided little joy on the home front.

But scratch the surface now, and the global economic recovery, while still tender, is displaying stronger signs of healing than it did even a few months ago. Given the recently robust — and surprising — growth in Canada, particularly in the labour market and consumer spending patterns, something was bound to give. 

And, on July 12, it did.

The Bank of Canada, led by governor Stephen Poloz, delivered the country’s first rate increase since 2010, taking the trendsetting lending level to 0.75 per cent, up 25 basis points from where it had stood since two 0.5-per-cent cuts in 2015.

Despite the long wait, this was no rash decision. Like the seven-year itch, fidelity to a particular monetary policy can run its course. 

It was, in the case of the BoC, simply time to move on — and up — after seven years without an interest rate increase. And there will be more upward monetary movements ahead.

“Economic data have been encouraging over the past few months, globally and especially for Canada,” BoC governor Stephen Poloz told reporters in Ottawa, following the interest rate decision.

Still, a major irritant remains south of the border. But even there, Poloz believes “delays in decision making in the United States (under the new Trump administration) seem to have moved some of those concerns more into the background.”

The bank’s latest Business Outlook Survey, for example, “finds very strong business sentiment, particularly for investment and hiring intentions, despite a lack of clarity about future U.S. policies.” 

Others might disagree.

Pedro Antunes, deputy chief economist at the Conference Board of Canada, insists the country “needs things to really change for the economy to keep going.” 

“We haven’t seen the private-sector investment to allow us to keep growing exports, to allow us to be competitive on that front. This year, what’s really been driving up the domestic economy has been the consumer on one hand — that very much related to the strong residential real estate activity, especially in key markets in Canada this year — and infrastructure,” he said.

Antunes expects infrastructure activity to “kick in a little bit more firmly over the rest of the year.”

“Of course, we have had a very expansionary monetary policy that has been in place for a number of years. But really, with the domestic drivers that are helping to lift growth this year, we think those will ease off. So, real estate markets should ease off next year. We’re already hearing about signs of that even today.”

For now, policymakers are forecasting economic growth of 2.8 per cent this year, followed by two per cent in 2018 and 1.6 per cent in 2019. Not bad when compared to other major industrialized nations. Household spending still accounts for much of our GDP growth, along with improving export activity and – to a lesser extent – business investment.

By comparison, the U.S. is expected to expand by 2.2 per cent in 2017, 2.1 per cent the following year and 1.8 per cent in 2019.

So far, the data seems to back up the positive overall outlook for the economy, and the possibility of another rate hike. The bank’s next policy meeting is scheduled for Sept. 6, but most analysts do not expect any decision on the trendsetting lending level until at least a month later, all the better to gauge the initial impact of the July decision.

Other indicators have improved as well, which could make it even more difficult for policymakers to hold off scratching again, at least for now. 

Last week alone, Statistics Canada reported manufacturing sales rose 1.1 per cent in May to $54.6 billion — the third straight monthly advance — beating expectation of a 0.8-per-cent gain for the month. 

The factory increases were led by sales in the transportation equipment and chemical manufacturing industries, the federal data agency said last Wednesday. 

Retailers also appeared to benefiting from the recent improvement in the economy, with Statistics Canada saying Friday that sales in June were up 0.6 per cent, beating the average private-sector forecast for a 0.3-per-cent advance and surpassing a meager 0.2 per cent gain in May. 

Sales for shopping outlets have now increased for three months in a row. 

Meanwhile, the inflation rate appears to be cooling more than anticipated. Statistics Canada reported Friday that annual price gains amounted to just one per cent in June, a 20-month low and far weaker than the central bank’s two-per-cent target. The Consumer Price Index came in at 1.3 per cent in May.

“There was nothing especially wonky about June’s results,” BMO Capital Markets said in a note to investors. A 3.7 per-cent month-over-month drop in gasoline prices “explained most of the headline weakness.”

“Overall, there’s nothing here to keep the BoC from staying on its gradual — presumably very gradual — tightening path,” said BMO’s chief economist Douglas Porter.

One thing is for sure, Canadians will not have to wait another seven years for the next interest rate itch.

Source: Financial Post

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