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overnight-rate-bank-of-canada-jan-2013The news of overnight target lending rate to remain the same is a cliché now.

You may already know abut the problems the bank has on its plate.

  • If the household debt is high – it is difficult for the bank to raise rate.
  • If the household stops spending – inflation goes down – again, it is difficult for the bank to raise rate.

Like any smart leader in a problem, the bank is just maintaining a status-quo. While holding its current ground, the central bank is trying to judge the situation to prepare for a future move. Alas! No one knows the future. Sometime the globe starts to spin a bit slowly or Europe gets a mouthful of hiccups.

In last three months the bank has changed its tone significantly on housing and personal debt load. After a prolonged cohorted fear mongering by – u-no-hu’s, now is the time to realise that if we chock personal spending – we shall stall our economy.

Statements by the bank:

23 October 2012

Housing activity is expected to decline from historically high levels, while the household debt burden is expected to rise further before stabilizing by the end of the projection horizon.

4 December 2012

Housing activity is beginning to decline from historically high levels. While the household debt burden continues to rise, growth in household credit has slowed. It is too early, however, to determine whether the moderation in housing activity and credit growth will be sustained.

23 January 2013

Caution about high debt levels has begun to restrain household spending. …. Consumption is expected to grow moderately and residential investment to decline further from historically high levels. The Bank expects trend growth in household credit to moderate further, with the debt-to-income ratio stabilizing near current levels. And there was nothing on housing this time.

It took only about two months for the bank to understand that the cautionary notes on high debt levels have started to work – but not exactly how they wanted it to be.

Now the effect went so much deep that people are actually paying off their debts rather than putting money in their RRSP’s. Guess who will feel the real pain now – obviously the lenders. Just warn the people about too much borrowing, too many times, – OSFI does not have to worry about implementing Basel – III, our banks will run in Basel IV standard.

The effects of it is already in the air – higher broker commission, despite of higher bond yield rates have denied to move and many more.

No economic policy will see the ultimate success if it fails to resonate with the commons. If policies are set by the government or its quasi-judicial agents then they are all for the people and by the people to begin with. It is not about how they see the future or judge the risks – it has to be about how people sees it and their job is to apply the right force to maintain the balance.

Afterall, democracy is all about majority voice. The bank should now focus on how to assign unbiased weightage factors to its variables. The current attenuation equation has flaw in it.