Bank of Canada Will Try To Suppress Rates, Says Housing Is “Stronger Than Expected”

Canada’s central bank’s rate announcement was brief, but had a lot of details for investors to unpack. Bank of Canada (BoC) announced they would be making no changes to rates at this time, as widely expected. Two details did stand out though – housing, and quantitative ease (QE). The central bank is surprised by housing strength, and separately said they would attempt to control yields with QE. While the two points were made separately, the public may perceive the latter as adding fuel to the former.

Not Today – No Changes To Policy Announced

The BoC announced they won’t be making any policy changes today, as widely expected by analysts. The overnight rate remains at the effective lower bound of 0.25%, as does the deposit rate. The bank rate is also still 0.50%. The only indicator that had a slight chance of moving was QE, and it was slim. The central bank announced they would continue with the program at $4 billion per week.

Housing and Economy Doing Better Than Expected

The BoC’s comments on housing were highly anticipated, but notably brief. They only mentioned housing once, saying “housing market activity has been much stronger than expected.”  

The economy also surprised the central bank. They said, “the economy is proving to be more resilient than anticipated to the second wave of the virus and the associated containment measures.” 

Even with the better than expected environment, they see “considerable economic slack.” The term means underutilized resources. In this situation, they were largely referencing elevated unemployment levels. He reiterated policy would remain loose until this slack has been absorbed. 

The slack will be considered absorbed when employment has improved, and “the 2 percent inflation target is sustainably achieved.” Inflation has an acceptable operating band of 1 to 3 percent, and the BoC is observing it at the bottom of this band. They see it rising “temporarily” to the top of the band over the next few months. 

Extra emphasis on temporarily. The central bank has already said a boost to inflation will be due to base effect. It expects inflation to settle at a lower lever after the comparison period smoothes, before hitting the ideal target. The BoC doesn’t see that occurring until at least 2022. 

QE Will Be Used To Try And Keep Rates Low

Circling back to those QE purchases, the governor stated they would maintain the level “to reinforce this commitment and keep interest rates low across the yield curve.” Adding, “the Bank will continue its QE program until the recovery is well underway.” 

The BoC’s message today may already be stale in the fast moving economy. The forecast with 2022 as the year of recovery is from January. RBC had stated they see revisions to this forecast, as the economy outperforms.

No changes were expected today, but the RBC economist said they’re watching bonds in April. If they see a reduction in QE then, it would be considered a sign of tightening “overly loose” monetary policy. That confirmation of the economy outperforming may lead to a hike in rates sooner than 2022.

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  • Ethan Wu 3 years ago

    Can’t control the yield without setting up the economy for catastrophic failure if it doesn’t need stimulus.

    Funny how the US is talking about that, but it’s not even on Canada’s radar.

  • SH 3 years ago

    A declaration of war on young Canadians.

    I’m convinced Trudeau wants Canadians gone. He knows that the newcomers vote Liberal in far greater numbers.

    • Brittany 3 years ago

      They’ve seriously misled young people to think the problem is capitalism, and that societal issues are all that matters. They don’t know any better and don’t realize the reason they’re so cynical is because they entered the workforce in the middle of possibly the greatest bubble of all time… and unfortunately they are too narcissistic to consider they might be missing something. Coming from a millennial, I used be afraid for friends in my age group and now I’m afraid of them (for what they’re about to allow to happen to our country.)

      • Bob Walter 3 years ago

        Free market economy and capitalism – despite some if its flaws -, in general, has worked pretty well to bring prosperity and wealth.

        Until central planners started to interfere. With good intentions to “equalize” and make things fair. I fear these groups are not interested in stake holders, but are only in for it to increase their control and line their pockets.

        Someone tell the government that wealth is not measured in currency units and amount of money printed but instead how much goods + services a society can produce efficiently.
        We are paying people to sit on their butt and do nothing, and produce nothing while we flip eachother houses.

  • Old Greg 3 years ago

    Do people understand what happens to fiat when you create immense sums of it? Welcome to the new Weimar Republic of Canada. Also buying houses at all time highs with all time low interest rates seems an unwise thing to do… No?

    • Brittany 3 years ago

      Society/media here (Better Dwelling being the exception!) give the absolutely worst advice and people here are so trusting they don’t seem to question anything (and most don’t understand well enough to see the error in this advice.) Everyone is under the impression we should buy when rates are low, no matter the market. They believe housing is a guaranteed investment and media encourages that, just like they blame Canadians for “hoarding cash” in the middle of a lockdown suggesting it’s our hoarding causing the slowdown in economy rather than the endless poor decision making on our governments part. It’s insanity.

  • Canaduh 3 years ago

    I haven’t posted here in a long time. Consistent reader. As a student of bubbles, I think we have reached the point where we are on the brink of serious and irreparable damage to the fabric of our economy. Another commenter mentioned Switzerland, etc. Look at the salaries there. Canada is uniquely positioned. What’s happening in real estate here is creating an unsustainable disconnect between an already depressed and stagnant labour market and the cost of living. We are now at the point where it is more profitable to flip homes than work. The bubble will bust eventually, as all bubbles do, however it may happen well after many decide they don’t want to play the game anymore. For every voter reading this blog, you have a choice not just next election but right now.

  • Average Man 3 years ago

    Look, everything you’re saying SHOULD be correct. But real estate in Canada has been detached from fundamentals for a while now. The “bubble” should have popped by now, right? And it hasn’t. It’s picked up steam. Nothing makes sense and it all seems crazy, but also I don’t see anything changing enough to cause a crash.

    Everything you’re saying is totally logical, but lived experience shows us it’s wrong.

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