With no clear economic recovery in sight, the Bank of Canada (The Bank) held its target overnight rate at 0.25 percent last week and announced continuation of its quantitative easing (QE) program, with purchases of at least $5 billion per week of Government of Canada bonds.
In its statement, The Bank said, “Both the global and Canadian economies are evolving broadly, with activity bouncing back as countries lift containment measures. The Bank continues to expect this strong reopening phase to be followed by a protracted and uneven recuperation phase, which will be heavily reliant on policy support. The pace of the recovery remains highly dependent on the path of the COVID-19 pandemic and the evolution of social distancing measures required to contain its spread.”
Although The Bank expects bumps in the economic road ahead, it highlighted some positives.
“The bounce-back in activity in the third quarter looks to be faster than anticipated in July. Economic activity has been supported by government programs to replace incomes and subsidize wages. Core funding markets are functioning well and this has led to a decline in the use of The Bank’s short-term liquidity programs,” it said. “Household spending rebounded sharply over the summer, with stronger-than-expected goods consumption and housing activity largely reflecting pent-up demand. There has also been a large but uneven rebound in employment. While recent data during the reopening phase is encouraging, The Bank continues to expect the recuperation phase to be slow and choppy as the economy copes with ongoing uncertainty and structural challenges.”
The hold was expected by economists and real estate executives.
“The Bank of Canada once again reiterated that they are not going to go any lower. The Bank seems cautiously pleased with the beginning of the economic recovery that is underway. They noted the housing activity rebound that occurred over the summer and attributed it to pent-up demand from the spring market,” says James Laird, co-founder of Ratehub.ca and president of CanWise Financial. “They continue to be committed to supporting the economic recovery by maintaining the overnight rate at its current record low.”
A panel of 20 economists organized by Finder.com all predicted the rate hold, with all but one of the panel members (95 percent) believing the rate will hold for longer than a year, compared to 81 percent in Finder’s July report.
Three quarters of the panel expect The Bank to hold steady until at least 2022 or even 2023, which The Bank has confirmed, said the National Bank of Canada in a statement.
“As Governor Tiff Macklem noted back in July, the policy rate will remain at the effective lower bound for at least two years. Going forward, there’s little more that The Bank is likely to provide in the way of direct monetary stimulus, especially with negative interest rates firmly off the table,” said the National Bank.
Interestingly, 26 percent of Finder’s panel expects The Bank to employ negative rates or any other unconventional policies, which is highly unlikely, says Derek Holt, vice-president and head of Capital Markets Economics at Scotiabank.
“The Bank has ruled out negative rates and narrowed its QE focus to buying federal government bonds,” says Holt. “This will continue to provide ongoing stimulus absent further moves.”
On the other side of the coin is Moshe Lander, economics professor at Concordia University.
“The Bank will need to pursue aggressively any and all policies to stave off deflation and to give a boost to demand to keep the economy from seizing up if and when the second wave comes in autumn,” says Lander.
Looking down the real estate road, the panel, on average, takes a moderate view of national residential housing valuation, not predicting any major changes from now until the end of 2020.
In July, they predicted an average two percent decline in property value nationally and now are forecasting an average increase of three percent, with Toronto leading the markets at a forecasted five percent increase. The most bullish panelist feels the major city average forecast becomes just one percent and Toronto five percent.
The panel was also polled about the Canada Emergency Response Benefit (CERB) transition at the end of September to a more targeted set of benefits, with 50 percent of them believing it would be sufficient for those negatively impacted financially by the pandemic.
Avery Shenfeld, managing director and chief economist at CIBC Capital Markets, believes this move will be positive for workers, “while base benefits are a bit lower than they were under CERB, there are more opportunities to earn labour income while retaining these benefits.”
Sebastien Lavoie, chief economist at Laurentian Bank, is not positive.
“Smaller cheques from the federal government could slow the pace of the recovery,” says Lavoie. “More income support from governments … is a small price to pay in the grander scheme of things.”
From Laird, the bottom line on mortgage matters.
“Fixed rates will remain at their current record low. It also means that variable-rate holders should not expect prime rates to change anytime soon,” he says. “Anyone looking to purchase in the fall should get a pre-approval so they understand how much they can qualify for and it guarantees the current market rates for up to four months. The real estate market rebound has caused mortgage lenders to compete by continuously lowering both fixed and variable rates to new historic lows.”
Copyright Postmedia Network Inc., 2020