Here’s why Canada’s interest rates are going to stay low

Rising debt levels won’t cause the Bank of Canada to budge



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Bank of Canada Stephen Poloz (Getty Images/Andrew Francis Wallace)




This article was originally published on Canadian Business.

Stephen Poloz said something last week that deserves more attention.

The Bank of Canada governor expressed confidence that regulatory changes were limiting home loans to those best able to finance them. It was the clearest statement yet that the central bank’s controversial decision to keep interest rates ultra-low won’t be altered over worries about a housing bubble or rising household debt levels.

Unlike their elected representatives in Ottawa—who continue to fetishize the economic virtue of balanced budgets—individual Canadians know what to do when presented with a once-in-a-lifetime opportunity to borrow money for virtually nothing. Household debt as a percentage of disposable income was was 163.3% in the first quarter, Statistics Canada reported last week—only marginally lower than the record 163.9% ratio the agency calculated for the fourth quarter.

These figures are the source of considerable stress for some. Poloz doesn’t appear to be one of them. He isn’t dismissive of the risk; the central bank ranks “household imbalances” among the things that trouble it most. Poloz also has ordered extensive study of the situation. Not so long ago, the central bank even appeared poised to raise interest rates due to concerns over financial stability.

Those concerns have either faded, or, more likely, been usurped by bigger ones. If debt is a problem, the easiest way to deflate it would be to raise interest rates. But for Poloz, that would be attacking a symptom of the post-crisis malaise, rather than the cause, which in his view is weak exports and business spending.

Last week, the Bank of Canada governor called elevated debt levels a “side effect” of the central bank’s struggle to boost stagnant economic growth. He gave no indication he would raise interest rates until data give him a reason to worry that inflation could approach 3%—the outer limit of the central bank’s target range. There is a long way to go before that will happen. The Consumer Price Index increased 0.8% in April from a year ago. (The Bank of Canada aims to keep inflation in the middle of band of 1% of 3%. Statistics Canada is scheduled to release CPI for May on Friday.)

The most revealing moment of Poloz’s press conference last week was his unequivocal confidence in Canada’s regulatory regime. Between 2008 and 2012, the federal government implemented a handful of ad-hoc policies meant to deter poorer households from taking on excessive debt, including the reduction of the maximum amortization period for government-backed home loans to 25 years from 40 years. Many countries did similar things after the crisis, recognizing that benchmark interest rates of zero—necessary to stimulate economic growth—could encourage the same sort of behaviour that caused the financial crisis. Economists gave it a name: “macroprudential policy.”

There were skeptics who said “macropru” would amount to little more than a fad. That is looking less and less likely. Economists at the International Monetary Fund concluded in 2014 that Canada’s measures had curbed credit growth. Poloz echoed those conclusions, saying last week that any analysis of the sustainability of debt must take into consideration that policy makers have learned a great deal about how to manage it.
“One thing we do know is that over the course of the years we have had some macroprudential changes to how this system works and we are comfortable those changes have done a lot to make sure the most fragile or the most vulnerable of those in that borrowing space are in effect being protected or have been prevented from excessive borrowing,” he said.
There are problems with Canada’s approach to macroprudential regulation. It is done behind closed doors by an inter-agency committee in Ottawa led by the deputy minister of finance. The public must take the word of the Bank of Canada and other officials that the system is working. The lack of transparency is problematic because cabinet ultimately decides when regulatory changes are needed. Politicians can be held to account at elections, but by then it could be too late.

But these are academic concerns to most executives and investors who simply want to know how much it is going to cost them to borrow money. Those men and women can be assured that household debt on its own won’t prompt Poloz to raise interest rates. He was clear last week that he is confident that most new debtors can afford their burden.

What troubles the Bank of Canada, Poloz said, is what would become of those households if there was another recession? It is a preoccupation that will ensure borrowing costs stay low for a lot longer still.

Kevin Carmichael is a journalist and senior fellow at the Centre for International Governance Innovation. He has written about economic policy and the men and women who make it for almost two decades from Ottawa, Washington and, currently, Mumbai. Follow him @CarmichaelKevin

3 comments on “Here’s why Canada’s interest rates are going to stay low

  1. Low interest rates will just delay the over leveraged, indebted Canadians that think are making wise financial decisions.Most of these Canadians did not take into account future costs, taxes, expenses, fees etc.

    Future increases, cost of living, for property taxes, home insurance, electricity, heat, water, repairs and maintenance, condo fees, medical, food, gas, car insurance, car repairs and maintenance, H.S.T on almost everything will outstrip more and more of their income.

    We all know income taxes and H.S.T and other taxes, fees will be added and increased over the next 25 years. These will be higher on average by 60% over the next 10 years but up by 3 to 4 time in 25 years on average.

    This is not even including the fact that auto loan, credit card debt and pay day or similar unsecured debt which are all much higher interest debt than mortgage debt are piling up fast for more Canadians.

    People are living on borrowed time and borrowed money and the Bank of Canada knows this and crosses their fingers and hopes it all does not get so bad.


  2. I saved $50,000 by the time I was 21 years old working multiple part-time jobs back in 1993, 1994, 1995. This $50,000 was invested in 30 year Canada strip bonds at 9.495% on average, 8.96% to 9.76%. When they mature in 2023 to 2025 in my RRSP’s and non-registered accounts, they will be worth $759,973.84.

    I had a gut feeling that interest rates would be cut but I never imagined to such low levels. It is a good thing my wife and I are good savers putting the max in RRSP’s and TFSA’s more recently and invest long term in government strip bonds while rates, yields were higher between 4.21% to 6.77%. Most of these still have 15 to 20 years left to maturity.

    We will wait for longer term interest rates, bond yields to rise in the next 1, 2, 3 years. We have not bought a government strip bond since December 2013.

    We have been amassing our yearly maxed out RRSP’s, TFSA’s in 5 and 7 year GIC’s since then at 3.00% to 3.2%. We have planned for possible shorter term expenses and have a $95,000 cashable GIC that is liquid and pays 2.00% for now.

    Right now, the highest paying government strip bonds, compound interest bonds are provincial ones in Canada, a net rate, yield of 3.4% is the best you can expect.

    We don’t see anything higher than 3.80% to 4.00% in the next 8 to 20 months. This will only happen if U.S. bond yields, rates rise.


  3. I know what you guys mean. Interest rates are really low but what happens if they go lower. I don’t know if this is possible but look at Europe at negative interest rates of up to 5 years and low, below 1% on German 10 year bond yields. Other countries are at best 2.0 to 2.25% which is not much better than the U.S.

    I am glad I did not listen to people back in 2000 when I invested my $125,000 in RRSP long term provincial and corporate zero coupon bonds. They were at 6.5% and 7.75%. High quality bonds, in the A’s.

    They will mature in 2030 at $952,000. It was a no brainer.


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