In the early ‘90s housing downturn – consumers remained worried about taking big loan for about 6 years. It took the market long time to start to recover and that risk avert mindset constrained credit growth in that period of time.
If we can take a lesson from the history then we can see that the slowdown started in 2008 would probably go beyond 2014. The growth of consumer credit started to slow down in 2008 and now it is trending well below its historical level.
As a matter of fact that is what exactly Bank of Canada and RBC economists are predicting. There could be a lot of if’s and but’s in economists’ predictions but it does look like a very reasonable one.
Bank of Canada thinks that inflation will start to rise after middle of 2014 and by that time it will also start to raise overnight lending rate. The problem of having low or no inflation is that it will kill any credit growth.
Since money is loaned into its existence – but not the interest – therefore to makeup for the interest we need growth and inflation. In case of both of them are low – credit growth will stall and money can not be loaned any more. That is not healthy for any economy.
It is likely that – other than some irregular market hiccups – we shall start to see a steady gain in the inflation by the end of this year.
Mortgage rates are not going to see any drastic change anytime soon but unexpected happens.
The short end of it is still deformed but that is influenced by Bank of Canada. The long end shows a slow trend of going back to its normal shape. Slowly but surely we are getting there.