In explaining the decision to leave borrowing costs alone for the third time in a row, as expected by the markets, the Bank of Canada said the global recovery is “proceeding at a somewhat faster pace” than policy makers had anticipated last fall, though “risks remain elevated.”
Rate hikes? What rate hikes?
January 18, 2011
Some housing market projections for 2011 include a projection that interest rates will increase which is going to stifle demand. But, I don’t really think so.
First of all, the Bank of Canada left their benchmark interest rate the same today. That matched market expectations. No surprises there.
According to the Globe and Mail:
But here’s the thing. Our dollar is high– incredibly high by historical standards. And increasing interest rates will encourage investors to buy more Canadian investments which increases the demand for our dollar (and you know what higher demand means– a higher price!). So the Canadian dollar will increase in value further.
And that makes our exports less competitive which is no good– especially considering our lagging productivity.
Check out this video posted by the Globe and Mail. It’s an interview with David Rosenberg that indicates his inkling that industry projections are a tad over-bullish on the economy right now.
The Bank of Canada should be worried about ensuring a steady recovery rooted in international competitiveness. This starts by not putting more pressure on the Canadian dollar.
So that’s why I don’t think the housing market should be concerned about rising interest rates. They’ll likely stay far lower than the historical average, despite CD Howe’s insistence that the overnight rate should start edging upward again.
The last time interest rates were supposed to rise back up to the historical average was in the summer. Carney raised rates three times by 25 basis points each time and then left the overnight rate at 1% (still far below the norm).
We’ll see, but my best guess is that we won’t get back to the historical average anytime soon.