When it comes to the future of interest rates, the Bank of Canada (BoC) is cryptic. It rarely comes right out and says what it’s thinking because that could disrupt financial markets.
Instead, the BoC plants clues in its public statements.
In yesterday’s rate announcement, for example, the BoC removed the word “eventually” from its commentary that rates will rise. When questioned about it today, Governor Mark Carney laughed it off. The market took that as a clue that rates may jump sooner than expected.
But that’s not a given, says Carney, at least not in the next year or so.
“You cannot mechanically assume that because the output gap…(will close)…that the bank’s target interest rate will be back at neutral, however you define neutral,” he said.
That’s because economic risks could remain, including a high Canadian dollar, a languid U.S. recovery and potential European debt defaults.
If you decode that, says RBC economist Dawn Desjardins, it means the BoC is likely “prepared to maintain a lower than neutral policy rate.”
BMO economist Douglas Porter agrees. He says the BoC’s language affirms that “rates are highly unlikely to approach so-called neutral (i.e., somewhere between 3% and 4%) perhaps until well into 2013, and potentially even later on.”
By the way, the Bank of Canada doesn’t announce what it considers to be a neutral policy rate. Economists can only speculate. Current estimates of “neutral” range from 2.5-4%—with approximately 3.00-3.25% being somewhere near consensus.
This all boils down to one thing, say analysts: The probability of rates skyrocketing anytime soon is minimal.
Granted, current rates are “exceptionally stimulative,”as Carney puts it, but that’s been warranted in order to maintain what little economic momentum we have.
Carney also went out of his way to emphasize that yesterday’s rate announcement refers only to “some” of the “considerable monetary policy” being removed. In other words, the Bank is not contemplating aggressive rate increases.
That is exactly what variable-rate mortgagors want to hear.
* The neutral rate is the rate level which, over the long run, keeps inflation near the Bank of Canada’s 2% target.
Rob McLister, CMT
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