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McLean's market musing for May 30

Blog by Nick Swinburne | May 30th, 2013

The end of an era occurred yesterday as Mark Carney, the outgoing Governor of the Bank of Canada, presided over his final interest  policy statement.   As expected, Carney held the status quo by maintaining that the next move on interest rates would be upwards. He supported this statement with data that showed the Canadian economy performed better in the first quarter than expected.  He also pointed to stimulus measures in Japan that should stimulate global commodity demand and improving expectations for Canadian exporters.   Since Carney is leaving his post to head the Bank of England, it was widely expected that no rate moves or change of policy tone would occur.

The speculation has now begun on how the new Governor of the Bank of Canada, Stephen Poloz, will make his mark on Canadian economic policy.  There seems to be mounting evidence that he will be more accepting of potentially decreasing rates to stimulate the economy.   This is supported by a few factors:  growth of mortgage debt is at the lowest rate since 2001, non-mortgage household debt is declining corporate profits are slumping, and inflation is currently very low, with a low likelihood of being a concern for the medium term.   By signaling the potential for a rate decrease, the dollar will decrease thereby improving the competitiveness of Canadian exporters on the global stage.  If this happens, the dollar may begin a downward trajectory that could end up closer to $0.90 than to par.   This will assist the tourism industry as well as the exporters but it will make things difficult for companies that import products from the US.

Bond yields are at a 3 month high and a couple of lenders have slightly increased fixed term interest rates.   More lenders will likely jump on the opportunity to increase rates since current rates do not leave a lot of room for profitability.   This increase may stay for a while but rates remain near historic lows and this slight increase should not dissuade many buyers.   

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Jason McLean   BSc, AMP
The Mortgage Centre: Garibaldi Mortgage
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