MNI:BOC Sees Interest Rates Normalizing On Way To Soft Landing
Bank of Canada Senior Deputy Governor Carolyn Rogers said Wednesday that interest rates are moving back to normal from the highest in decades while avoiding an economic hard landing and households are able to cope with painful mortgage refinancing over the next two years.
"Monetary policy worked: not painlessly, but it did get inflation under control without creating the sharp economic downturn that many feared," Rogers said in the text of a speech she's giving to the Economic Club of Canada in Toronto. "Interest rates have started to come down, and we have the prospect of further normalization ahead."
The remarks didn't get into whether the Bank will repeat its October half-point rate cut at next month's decision, and investors are split on whether it's an out-sized move or a return to quarter-point cuts seen at three decisions earlier this year. While most of the speech discussed Canada's mortgage market and warned that tinkering won't restore affordability and could cause instability, she affirmed the Bank's view lower rates will help households after a volatile couple of years.
"Our forecast includes the expectation that households will continue to adjust their saving and spending patterns to absorb the impact of higher mortgage payments. And as interest rates come down that impact will fade, and consumption will gradually pick up," Rogers said. With 60% of mortgages up for renewal over the next two years there are some "tail risks" of a drop in consumer spending and losses across the banking system, she said.
Canada's standard mortgage is a five-year fixed rate loan and many borrowers had locked in when rates were near zero. Many now face a big reset with the Bank's current overnight rate at 3.75%. The country has long been identified as one of the world's most stretched housing markets as prices surged beyond the million-dollar mark in Toronto and Vancouver.
"Even if the economy is getting back to something approaching normal, we’re still expecting a future with more economic volatility and generally higher interest rates than we saw over much of the past two decades," Rogers said.
With the government recently announcing what it billed as the biggest mortgage relief in decades, Rogers cautioned that "there's no free lunch" when it comes to balancing things like financial stability and affordability. Much of the worsening of affordability relates to an imbalance between supply and demand that mortgage rules don't address, she said, while policy tinkering may bring side effects.
"While longer amortizations and smaller down payments will increase returns for lenders, they also increase risk," she said. "This increases the cost for lenders, and that cost often gets passed on to the borrower in the form of higher interest rates."
"Leaning too much on measures that reduce the short-term cost of financing could have long-term impacts on the financial health of households, the mortgage market and the economy."