OTTAWA—The Bank of Canada remained cautious on the recent strong performance in the Canadian economy and held its target for the overnight rate at 0.5 percent on May 24, as widely expected.
The Bank’s neutral interest rate decision didn’t hint at an impending rise in rates due to hot housing markets, which some observers had been calling for, although the insertion of “at present” after “the current degree of monetary stimulus is appropriate” gave the Canadian dollar a boost. The economy is expected to reach full potential (closing of the output gap) in the first half of 2018 and most economists foresee no rate hikes until then.
Many segments of the Canadian economy such as job growth and consumer spending are showing encouraging signs; however, inflation, wage growth, and exports remain weak.
And global uncertainty is still king. NAFTA re-negotiations now loom.
“The uncertainties outlined in the April MPR [Monetary Policy Report] continue to cloud the global and Canadian outlooks,” said the Bank of Canada on May 24.
The Bank said on April 12 in its Monetary Policy Report that a rise in global protectionism remains the “most important source of uncertainty facing the Canadian economy.”
Hot Housing
The Bank made it clear in April that taming fiery housing markets is up to politicians, even though economists blame low interest rates as being the biggest culprit for the rising prices.
The BoC said that measures enacted by governments including foreign buyers taxes and the need to qualify for mortgages at higher rates “have yet to have a substantial cooling effect on housing markets.”
“We expect the rule changes to be sufficient to slow housing market activity, but as long as expectations for rates to remain low persist, the risks is that hot markets will stay on a slow burn and there is little reason to expect consumer spending growth to weaken significantly,” said RBC deputy chief economist Dawn Desjardins in a note.
Toronto’s housing market appears to be in the early stages of cooling based on preliminary May readings from the Toronto Real Estate Board. Listings soared 47 percent in the first two weeks of May. This is a continuation of what the Canadian Real Estate Association reported for April that the number of sales listings in the Greater Toronto Area (GTA) spiked. The data suggests these housing markets have started to cool.
Sentiment is also changing given the jitters inflicted on the market from Home Capital’s woes and people may be rushing to the exits to cash in their real estate gains before things get noticeably worse.
In April, the Bank highlighted the presence of housing market speculation in the GTA and that the rate of price appreciation was out of line with fundamentals, but that a rate increase would do little to deter speculators.
Some economists have argued that the BoC should lean toward raising interest rates to cool off overheating housing markets, but the central bank’s job is to focus on inflation first.
The Bank’s three core inflation measures (used to get a better idea of price trends by excluding volatile items) appear to be trending lower and headline inflation came in at a paltry 1.6 percent in April. This speaks to what the Bank has been saying—that the economy still has room to grow.
Wage growth slipping to its lowest level on record in April at 0.5 percent also suggests the economy has much room to improve. However, a larger sample of payrolls data “shows a much more credible 2 percent + pace to wages,” according to a note form CIBC chief economist Avery Shenfeld.
“This measure is more consistent with regional employment growth and, we think, a sounder indication of the underlying trend in wage gains,” according to Desjardins’ note.
The Bank pointed to food prices, which continue to decline due to “intense retail competition,” resulting in temporarily lower inflation.
The Canadian economy had a very strong first quarter—projected in April by the BoC to have grown 3.8 percent. That figure looks to be conservative now based on updated estimates from economists.
The central bank expects “some moderation in the second quarter” and interest rate hikes don’t appear to be in the very near future because of below-target inflation and despite hot but cooling housing markets in the GTA.
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