Despite trade threats Canadian home buyers must plan for still higher rates: Don Pittis
If tariffs create new inflation, Bank of Canada won't hesitate to raise interest rates
If you were hoping that a trade war would bring down your borrowing costs, there are increasing signs it's not going to happen.
As the Canadian Real Estate Association rolls out its latest data on resale homes today, buyers and sellers should make their plans with rising interest rates in mind.
Of course, when the future is unknowable, planning for higher rates is always prudent. But a look at the latest data and a careful reading of last week's comments by Bank of Canada governor Stephen Poloz suggest prudence is especially important just now.
For anyone with a memory of mortgage rates that stretches back a decade or more, last week's rise in the Bank of Canada key lending rate to 1.5 per cent seems quite moderate.
But for those who bought into the Canadian real estate market way back when you could get a mortgage for less than two per cent — just one year ago — renewing could turn out to be painful.
"The jump in payments will be greatest for those who took out mortgages when interest rates were at their lowest levels," said Poloz last week while announcing his latest hike.
Many commentators, including this one, have hinted that the economic impact of a trade war could slow the pace of interest rate hikes, giving borrowers a break. In the long term, that may be so.
But a series of new economic indicators, including inflation, jobs, housing starts and economic growth, added to last week's comments from both Poloz and U.S. Federal Reserve chairman Jerome Powell, indicate the trend toward higher interest rates is not over.
And except for the nasty impact on those of us with large debts, rising interest rates are a good sign for the North American economy. They are one more signal that nearly a decade of low interest rates have done their job, pulling the economy out of recession and into sustained growth.
There are plenty of reasons to think the good times must end eventually, but not before interest rates rise further.
While it is easy to poke fun at U.S. President Donald Trump and decry his outrageous statements on so many issues, it is harder to deny his stimulating impact on the U.S. and thus the Canadian economy.
Low interest rates and the Federal Reserve's money-printing called quantitative easing that began during the Obama presidency have only been part of it.
There are signs that Trump's large tax cuts have also juiced the economy, simultaneously unleashing the long-awaited "animal spirits" of U.S. capitalist entrepreneurs.
Even while he threatens trade wars with nearly everyone, his NATO rants against under-spending are drumming up business for the U.S. defence establishment, a well accepted form of additional Keynesian-style economic stimulus.
As any parent knows, over-stimulation can end in tears, but for now, we are still at the economic-stage equivalent of giggling and running around the park in diapers.
The Fed's stern-faced Powell, who realizes the economy may be facing too much stimulation, is not giggling. Like Poloz, last week Powell warned of the effects of trade disruption, especially if Trump's actions eventually lead to higher tariffs on a lot of goods and services.
"That could be be a negative for our economy," said the Fed chairman in a media interview.
But as U.S. consumer inflation hit nearly three per cent last week and job creation continues to soar, Powell has so far had no reason to back off on his plan for two more rate hikes this year.
The inflation priority
The Canadian economy is also cranking out jobs and Canadian inflation numbers are out later this week. Since rising interest payments count toward inflation while rising (or falling) house prices do not, a moderation in real estate values will offer no relief on consumer price statistics.
And while Canada's chief central banker insisted rising U.S. rates have absolutely no impact on the Bank of Canada's interest rate decision, the same factors that cause prices to rise in the U.S. leak across our porous border and guide the governor's hand.
Almost no one, including Poloz, is ruling out a resolution of the NAFTA trade conflict, which would likely lead to a stronger economy and higher rates.
But bizarrely, even if worse tariffs do kick in and begin to do long-term economic damage, they could start by creating a new wave of rising prices, forcing the bank to increase, not decrease, interest rates.
"They could hinge on just how big of an inflation bulge happens, how important the tariffs are to the inflation process," said Poloz. "If the economy is operating at capacity, it can cause a shift up in inflation expectations and that is something we would vigorously prevent."
In other words, if tariffs create new inflation the Bank of Canada will not hesitate to raise interest rates to keep inflation in check.
It was a good reminder that inflation, not the general health of the economy, is a central bank's job one.
Inflation control is at the foundation of what the Bank of Canada does, said senior deputy governor Carolyn Wilkins at the monetary policy press conference last week.
In a world of uncertainty, inflation control is what makes the Canadian dollar a safe store of value, something crucial to every Canadian and every business. Wilkins says it's worth defending.
"We take it a bit for granted, because we've had it so long, but you just need to look to other countries or other times in Canada's history to see just how useful it is today."
Follow Don on Twitter @don_pittis