17 ms·

Bank of Canada increases overnight rate target to 1 per cent

261 points by lpgauth 9y ago

Froyoh 9y ago
On a side note, can you believe it's been 10 years since 2008 economic crisis?!
make3 9y ago
For those like me who didn't know what the over night rate is: "The overnight rate is the interest rate at which major financial institutions borrow and lend one-day (or `overnight`) funds among themselves; the Bank sets a target level for that rate." http://www.bankofcanada.ca/core-functions/monetary-policy/key-interest-rate/ http://www.bankofcanada.ca/core-functions/monetary-policy/ke...
- bryanlarsen 9y ago
  More importantly, the "prime rate" at the banks almost always is relative to the overnight rate, and almost all short term or floating interest rates are relative to the prime rate.
- delinka 9y ago
  I'm not sure I understand "target" in this context. Does it mean "a suggested rate" or "lowering/increasing the current rate over time toward this target" or "the actual rate"?
  - toomuchtodo 9y ago
    It is a rate they attempt to achieve through their actions. They can influence the rate, but not outright set it due to market conditions. Think of it like setting the temp on a thermostat. You are attempting to achieve a temperature through the use of a device to put energy into a system, but there are other factors that contribute to the actual temperature achieved.
    - delinka 9y ago
      Excellent details. Thanks.
    - sparky_z 9y ago
      I'd say it's more like adjusting the input voltage to the AC directly than simply setting the thermostat. They have to monitor the results and changing conditions and then make adjustments manually, rather than rely on an automatic feedback loop.
    - IBM 9y ago
      Just to be clear, the Bank of Canada can control the overnight rate if it moves outside of the "operating band" by directly intervening in the market with overnight repo and reverse repo operations [1]. [1] http://www.bankofcanada.ca/2015/10/overnight-repo-overnight-reverse-repo-operations/ http://www.bankofcanada.ca/2015/10/overnight-repo-overnight-...
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JamesCoyne 9y ago
Previous rate was 0.75%
deleted 9y ago
[deleted]
IB885588 9y ago
The exchange rate between the USD and CAD jumped by over 1% at the announcement despite it being widely expected: https://www.bloomberg.com/quote/USDCAD:CUR https://www.bloomberg.com/quote/USDCAD:CUR
- jszymborski 9y ago
  A hike was expected, but many believed it'd be another month or two, and as such was surprise to many.
levesque 9y ago
So what exactly does this entail?
- betaby 9y ago
  More expensive loans, higher interest rate on mortgages and credit cards. Traditionally saving accounts won't be affected and still have near zero return rate thought.
  - Mister_Snuggles 9y ago
    Another thing to note is that variable rate mortgages will see their rates increase within a day or two. Mine hasn't gone up yet, but I expect it to increase tomorrow. This does not necessarily translate to higher payments, instead it just means the mortgage will take a little longer to pay off. To explain a little further: A variable rate mortgage can have fixed payments - every day your mortgage accrues a bit of interest, then when you make the payment it pays off that interest and the remainder pays off the principal. If the interest rate increases that just means that the interest that accrues every day is a bit higher and less of your payment goes against the principal, so it takes longer to pay it off. If the interest rate hits the point (the trigger rate) where your monthly payments no longer cover the interest, then your bank will call and want to increase your payments. In this case, a rate hike will translate to higher payments.
  - cpncrunch 9y ago
    >saving accounts won't be affected and still have near zero return rate While the big banks have near zero savings interest rates, most of the credit unions and low-fee banks (like Tangerine) have higher rates. I've used Outlook Financial for years, as they tend to have the highest rates (1.7% for regular savings, at the moment). I don't understand why you say "saving accounts won't be affected", as savings rates are ultimately tied to mortgage rates (the difference between the two gives the bank their profit).
    - betaby 9y ago
      > I don't understand why you say "saving accounts won't be affected", as savings rates are ultimately tied to mortgage rates (the difference between the two gives the bank their profit). They don't, that's why. In contrast variable mortgages and credit card rates are explicitly tied to the prime rate.
Slurpee99 9y ago
http://www.ctvnews.ca/bank-of-canada-raises-overnight-rate-to-1-per-cent-1.3576893 http://www.ctvnews.ca/bank-of-canada-raises-overnight-rate-t... > The move, which will likely be a surprise for some, came less than a week after the latest Statistics Canada numbers showed the economy expanded by an impressive 4.5 per cent in the second quarter. > "Recent economic data have been stronger than expected, supporting the bank's view that growth in Canada is becoming more broadly-based and self-sustaining," the bank said. > The rate increase means governor Stephen Poloz has now reversed the two cuts he introduced in 2015 to help the economy deal with the plunge in oil prices. The bank said Wednesday the increasingly robust economy shows it no longer needs as much stimulus. > Others predicted the bank would refrain from moving the rate out of concern such a move would drive up an already strengthening Canadian dollar and pose a risk to exporters. > In its statement, the bank also said headline and core inflation have seen slight increases since July, largely as expected. It noted, however, that upward pressure on wages and prices remain more subdued than historical trends would suggest, which has also been seen in other advanced economies.
latch 9y ago
For those not following Canada's economy. Two weeks ago no one was sure if they'd hike the rate again, and no one thought they'd do it so quickly (though it seemed likely they'd do it ~oct/nov). But, Canada posted exceptionally strong growth numbers (4.5%) at the end of August, which kind of made this very likely. Also, the government just sold bonds that mature in 2064 (at 2.2%) and has indicated that it might issue more "ultra-long bonds" in the coming months. All this to say, money's going to stop being cheap.
- SimbaOnSteroids 9y ago
  Why would any entity buy bonds that when matured will not have kept up remotely with inflation? Obviously I'm missing some key idea here, I just have no idea what it is.
  - jvm 9y ago
    Looking at RBS spreads here: http://www.bankofcanada.ca/rates/interest-rates/lookup-bond-yields/ http://www.bankofcanada.ca/rates/interest-rates/lookup-bond-... …looks like the market expects 1.57% inflation over the next 10 years, so these bonds are expected to beat inflation handily.
  - feriancek 9y ago
    As a hedge against a market collapse?
    - X86BSD 9y ago
      Like gold and silver?
      - QAPereo 9y ago
        More like TP, antiobiotics, guns and ammunition.
        blobbers 9y ago
akgerber 9y ago
Relatedly, the Toronto housing market that kept shooting up even as the US hit its 2008 housing crisis now have hit their top: https://www.bloomberg.com/news/articles/2017-09-06/toronto-housing-market-continues-slowdown-with-august-price-drop https://www.bloomberg.com/news/articles/2017-09-06/toronto-h...
- tostitos1979 9y ago
  Toronto's property market is insane. I am still seeing condos (e.g. Gibson near North York center) being priced at 600K+ for 1+1 and larger units well over 1 million dollars. Not sure who can afford this. Places as far as Vaughan and Milton are expensive. We're talking decent detached houses (slightly above starter home) for over 1 million.
  - plaguuuuuu 9y ago
    Sydney is up there as well. A one bedroom apartment in my building just sold for nearly US$900k. This is a nice area, 30 mins from the CBD, but still..
  - apexalpha 9y ago
    >Not sure who can afford this. It's just investors selling them to other investors until they, as a collective hive-mind, realise this and then investors will stop buying houses and the price will go down.
  - randomdata 9y ago
    Milton is completely understandable given that it grew by 34% in just 5 years[1] and is the sixth fastest growing community in Canada according to Statscan. That is a considerable amount of pressure on existing housing stock. Vaughan gained nearly as many people in absolute numbers, although being larger city means smaller growth as a percentage. [1] http://www12.statcan.gc.ca/census-recensement/2016/dp-pd/prof/details/page.cfm?Lang=E&Geo1=POPC&Code1=0532&Geo2=PR&Code2=47&Data=Count&SearchText=Milton&SearchType=Begins&SearchPR=01&B1=All&GeoLevel=PR&GeoCode=0532&TABID=1&wbdisable=true http://www12.statcan.gc.ca/census-recensement/2016/dp-pd/pro...
  - 9y ago
fpgaminer 9y ago
I'm still learning all the tendencies of these macroeconomic trends... So, this should mean mortgage loan rates, savings account interest rates, and inflation are all now on an upward trend. Right? And thus housing prices should begin to curb, since the cost of loans making buying houses more expensive and less appealing, thus lowering demand. (I've already noticed increasing savings account rates and mortgage rates, so it definitely seems like this is an upward trend, though I haven't seen much curbing of housing prices yet)
- dredmorbius 9y ago
  Correct on housing. Low interest rates tend to increase housing prices. Rising interest rates tend to decrease them. The rent paid on money captures the rent paid to housing owners. It's a bit like a Georgian land tax, except that banks win.
- graeme 9y ago
  > and inflation are all now on an upward trend. Right? Not inflation. Inflation isn't going up much anywhere. It's a conundrum for central bankers. The old model may no longer work. Normally, when unemployment goes low enough, wages and then prices go up. That hasn't really happened. Instead, house prices (in Canada) and consumer debt are rising.
  - surement 9y ago
    > It's a conundrum for central bankers. The old model may no longer work. It is (and has been for a while) the goal of the Bank of Canada to keep inflation between 1% and 3%: http://www.bankofcanada.ca/core-functions/monetary-policy/inflation/ http://www.bankofcanada.ca/core-functions/monetary-policy/in... And it is not doing too bad: https://tradingeconomics.com/canada/inflation-cpi https://tradingeconomics.com/canada/inflation-cpi
    - graeme 9y ago
      They're raising rates while inflation is at the low end of their band. Normally, they wouldn't do that. Or rather, normally inflation would be going up now that the economy is. My point was that inflation and growth/employment may have decoupled. This article expands that argument at length: http://business.financialpost.com/news/economy/the-phillips-curve-is-broken-heres-why-that-is-keeping-economists-up-at-night http://business.financialpost.com/news/economy/the-phillips-...
chvid 9y ago
Zzzzzz - wake me up when they hike it to 10 per cent.
dmix 9y ago
The commonwealth countries are all facing a property bubble (Canada, New Zealand, Australia, etc). The household debt levels and property prices didn't taper off nearly as much following the 2008 US housing crisis and has pretty much continued unabated: http://www.huffingtonpost.ca/stephen-punwasi/real-estate-bubble-commonwealth_b_12385078.html http://www.huffingtonpost.ca/stephen-punwasi/real-estate-bub... Which is fascinating to consider that the Bank of Canada, et al, have let this happen for so long and are only reacting now... By artificially keeping rates near 0% the idea was to 'stimulate' the economy by making capital freely available, so for example, banks can more easily loan money to businesses generating long term economic growth and add new jobs. But the side effect has been that retail banks were incentivized to hand out cheap mortgages and the public was incentivized to speculate on the 'hot' property market. If this bubble doesn't deflate smoothly this will be yet another very expensive side effect of mainstream monetarist policy.
- benlorenzetti 9y ago
  > By artificially keeping rates near 0%... I agree with your sentiment and artificially is a powerful word for conveying that. But strictly speaking the rate the central bank sets for lending new money is artificial, or fiat, no matter what we decide it should be (So long as it is > 0).
  - e_d_e_v 9y ago
    You could set the rate for lending new money algorithmically based on a set of other observed statistics of the credit markets. Then it would not be artificial or fiat. The algorithm might be artificial but the rate itself would not. This is not (to my understanding) how it usually works.
    - benlorenzetti 9y ago
      I would say the rate is still artificial. If windows were the only allowed OS and Linux and Apple users were regularly jailed, I think we would say the price for windows was artificial, no matter if it were set by a government approved algorithm or not. My point is that the connotation we associate with the word artificial varies with our opinion of the legitimacy of the monopoly in question. People who are disinclined toward the federal reserve will read artificial differently from those who think it does a good job.
cthrow 9y ago
Quick summary: Overnight rate directly affects the prime rate, the rate at which commercial banks loan to their least risky customers. In the US, prime rate hovers 3% above overnight rate (federal funds rate). You can see that relationship here: https://fred.stlouisfed.org/graph/fredgraph.png?g=eY9Y https://fred.stlouisfed.org/graph/fredgraph.png?g=eY9Y In basic economic theory, when interest rates go up, the economy slows down. Higher interest rates encourage saving/purchasing safe assets, and make lending/investing in risky assets or new business ventures more expensive. Banks generally make less loans that fuel direct economic activity when interest rates are higher. Context/So What: Canada's economy showed strong signs of growth and low unemployment, so the central bank decided to bump up the interest rate a bit while the data supported the decision to "cool off" the economy. OK, so commercial loan interest rates will rise 0.25%. Not a huge deal for majority of the economy. More importantly, the central bank is slowly gaining back the overnight rate as a tool for monetary policy. Many central banks are unwilling to drop the overnight rate below 0%, effectively taxing banks for the reserves they are usually mandated to hold with the central bank.* If the Bank of Canada can continue to bump the overnight rate up to traditional 4-5% level, it can then cut the rate again to spur economic activity in the case of a downturn. The closer the overnight rate is to 0%, the less effective the rate is as a monetary policy tool. Personally I believe it will be a long time before we see 4-5% overnight rates again, but overall this is a reaction to good economic news. It happened before investors expected, so the markets are buzzing about it a bit, even though the small bump will probably not have a large impact on Canada's economy. *BoC actually has no reserve requirements: http://www.bankofcanada.ca/1997/04/working-paper-1997-8/ http://www.bankofcanada.ca/1997/04/working-paper-1997-8/
refurb 9y ago
This will be very interesting to watch. The Toronto real estate market has already started to correct. Prices are down 20-30% seconds nice earlier this summer. A ton of people eager to buy "before prices go even higher" are getting creamed. Interest rates going up will only make this worse. Hold on tight!!
- to_bpr 9y ago
  >Hold on tight!! An apt caption for the uncertainty in Toronto introduced by Wynne's last desperate attempts to change people's minds on her.
- asdf33323 9y ago
  Prices aren't down 20-30% - you're referring to average sales price. Big difference. It's been attributed to the sales mix (people opting for condos/townhomes)
  - randomdata 9y ago
    It is also worth noting that there was exceptionally abnormal growth[1] early in the year. The average price for July only brought it back to trend. It will be interesting to see what August numbers bring. [1] http://creastats.crea.ca/treb/images/treb_chart05_xhi-res.png http://creastats.crea.ca/treb/images/treb_chart05_xhi-res.pn...
  - myth_drannon 9y ago
    They are. You can check the prices by categories. Detached houses -20%, condos are still holding up. Houses went from 960K to 720K since April
    - asdf33323 9y ago
      read my comment again. sales mix.
    - tostitos1979 9y ago
      Sorry. Your info doesn't match the same reality I live in. As the parent said, sales went down (don't know about mix). Prices for detached homes have not. We were seriously putting offers in March and got outbid for INSANE sums. e.g. 720K offer in Milton .. property went for 100K over. In Mississauga, homes listed for 850K went for 950K-1million. I am looking at data now and it has slowed but not gone down yet.
blobbers 9y ago
Informational note: The notion of fixed rate mortgages does not exist in Canada. You can lock in for about 5 years, but otherwise your mortgage rate floats with prime. If prime rates rise, borrowers can be on the hook for large amounts of defaults as incomes fail to keep up with higher payments. (canadian housing market exhibits higher sensitivity to interest rates)
- asdf33323 9y ago
  "The notion of fixed rate mortgages does not exist in Canada." ... "You can lock in for about 5 years" what?
  - rconti 9y ago
    Mortgages are typically longer than 5 years.
    - tostitos1979 9y ago
      Exactly. In a US 30 year mortgage, it is reasonable to expect a borrower to pay it off. In a 5 year mortgage, you will typically refinance after 5 years (unless you hit the jackpot in the interim).
      - sliverstorm 9y ago
        That sounds obnoxious, being forced to refinance 5 times. Why not a 30 year 5/5 ARM? (Rate adjusts every 5 years to market rate)
  - dzdt 9y ago
    In the US, the most standard "fixed rate" mortgage has the rate fixed for 30 years. A mortgage where the rate changes before loan maturity would be called an "adjustable rate mortgage" ("arm" for short).
    - peeters 9y ago
EternalData 9y ago
Are inflationary measures in an age of technological deflation and rapidly shifting consumer baskets still really a valid view into inflation?
- emodendroket 9y ago
  Have you stopped buying fuel or food?
  - EternalData 9y ago
    I don't buy fuel (don't use a car) and aside from the rates set by the electricity provider (essentially a monopoly provider in California) and public transit provider (a city monopoly), fuel costs don't affect me and I actually choose to spend a higher amount with discretion since I moved to the Solar Choice program. Food is such a small part of my discretionary spend (I buy grains in bulk, specifically quinoa, and greens from the farmer's mart). Looking back at my spend, the majority of it is in technology that is undergoing massive deflation, or my pet hobby of collecting rare books (neither of which is accounted for in the basket). I am probably an edge case, but the point remains -- the basket that is set seems outdated. I can't imagine that people are spending as much on food as you think. ex: "USDA data shows that in 2010 Americans spent 9.4 percent of their disposable income on food"
larvaetron 9y ago
> Did you know that your browser (Opera ) is out of date? Erm, thanks... but I'm using Chrome on a Google Pixel?

261 points by lpgauth 9y ago

On a side note, can you believe it's been 10 years since 2008 economic crisis?!

For those like me who didn't know what the over night rate is: "The overnight rate is the interest rate at which major financial institutions borrow and lend one-day (or `overnight`) funds among themselves; the Bank sets a target level for that rate." http://www.bankofcanada.ca/core-functions/monetary-policy/key-interest-rate/ http://www.bankofcanada.ca/core-functions/monetary-policy/ke...

bryanlarsen 9y ago
More importantly, the "prime rate" at the banks almost always is relative to the overnight rate, and almost all short term or floating interest rates are relative to the prime rate.
delinka 9y ago
I'm not sure I understand "target" in this context. Does it mean "a suggested rate" or "lowering/increasing the current rate over time toward this target" or "the actual rate"?
- toomuchtodo 9y ago
  It is a rate they attempt to achieve through their actions. They can influence the rate, but not outright set it due to market conditions. Think of it like setting the temp on a thermostat. You are attempting to achieve a temperature through the use of a device to put energy into a system, but there are other factors that contribute to the actual temperature achieved.
  - delinka 9y ago
    Excellent details. Thanks.
  - sparky_z 9y ago
    I'd say it's more like adjusting the input voltage to the AC directly than simply setting the thermostat. They have to monitor the results and changing conditions and then make adjustments manually, rather than rely on an automatic feedback loop.
  - IBM 9y ago
    Just to be clear, the Bank of Canada can control the overnight rate if it moves outside of the "operating band" by directly intervening in the market with overnight repo and reverse repo operations [1]. [1] http://www.bankofcanada.ca/2015/10/overnight-repo-overnight-reverse-repo-operations/ http://www.bankofcanada.ca/2015/10/overnight-repo-overnight-...
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JamesCoyne 9y ago

Previous rate was 0.75%

deleted 9y ago

[deleted]

IB885588 9y ago

The exchange rate between the USD and CAD jumped by over 1% at the announcement despite it being widely expected: https://www.bloomberg.com/quote/USDCAD:CUR https://www.bloomberg.com/quote/USDCAD:CUR

jszymborski 9y ago
A hike was expected, but many believed it'd be another month or two, and as such was surprise to many.

levesque 9y ago

So what exactly does this entail?

betaby 9y ago
More expensive loans, higher interest rate on mortgages and credit cards. Traditionally saving accounts won't be affected and still have near zero return rate thought.
- Mister_Snuggles 9y ago
  Another thing to note is that variable rate mortgages will see their rates increase within a day or two. Mine hasn't gone up yet, but I expect it to increase tomorrow. This does not necessarily translate to higher payments, instead it just means the mortgage will take a little longer to pay off. To explain a little further: A variable rate mortgage can have fixed payments - every day your mortgage accrues a bit of interest, then when you make the payment it pays off that interest and the remainder pays off the principal. If the interest rate increases that just means that the interest that accrues every day is a bit higher and less of your payment goes against the principal, so it takes longer to pay it off. If the interest rate hits the point (the trigger rate) where your monthly payments no longer cover the interest, then your bank will call and want to increase your payments. In this case, a rate hike will translate to higher payments.
- cpncrunch 9y ago
  >saving accounts won't be affected and still have near zero return rate While the big banks have near zero savings interest rates, most of the credit unions and low-fee banks (like Tangerine) have higher rates. I've used Outlook Financial for years, as they tend to have the highest rates (1.7% for regular savings, at the moment). I don't understand why you say "saving accounts won't be affected", as savings rates are ultimately tied to mortgage rates (the difference between the two gives the bank their profit).
  - betaby 9y ago
    > I don't understand why you say "saving accounts won't be affected", as savings rates are ultimately tied to mortgage rates (the difference between the two gives the bank their profit). They don't, that's why. In contrast variable mortgages and credit card rates are explicitly tied to the prime rate.

Slurpee99 9y ago

http://www.ctvnews.ca/bank-of-canada-raises-overnight-rate-to-1-per-cent-1.3576893 http://www.ctvnews.ca/bank-of-canada-raises-overnight-rate-t... > The move, which will likely be a surprise for some, came less than a week after the latest Statistics Canada numbers showed the economy expanded by an impressive 4.5 per cent in the second quarter. > "Recent economic data have been stronger than expected, supporting the bank's view that growth in Canada is becoming more broadly-based and self-sustaining," the bank said. > The rate increase means governor Stephen Poloz has now reversed the two cuts he introduced in 2015 to help the economy deal with the plunge in oil prices. The bank said Wednesday the increasingly robust economy shows it no longer needs as much stimulus. > Others predicted the bank would refrain from moving the rate out of concern such a move would drive up an already strengthening Canadian dollar and pose a risk to exporters. > In its statement, the bank also said headline and core inflation have seen slight increases since July, largely as expected. It noted, however, that upward pressure on wages and prices remain more subdued than historical trends would suggest, which has also been seen in other advanced economies.

latch 9y ago

For those not following Canada's economy. Two weeks ago no one was sure if they'd hike the rate again, and no one thought they'd do it so quickly (though it seemed likely they'd do it ~oct/nov). But, Canada posted exceptionally strong growth numbers (4.5%) at the end of August, which kind of made this very likely. Also, the government just sold bonds that mature in 2064 (at 2.2%) and has indicated that it might issue more "ultra-long bonds" in the coming months. All this to say, money's going to stop being cheap.

SimbaOnSteroids 9y ago
Why would any entity buy bonds that when matured will not have kept up remotely with inflation? Obviously I'm missing some key idea here, I just have no idea what it is.
- jvm 9y ago
  Looking at RBS spreads here: http://www.bankofcanada.ca/rates/interest-rates/lookup-bond-yields/ http://www.bankofcanada.ca/rates/interest-rates/lookup-bond-... …looks like the market expects 1.57% inflation over the next 10 years, so these bonds are expected to beat inflation handily.
- feriancek 9y ago
  As a hedge against a market collapse?
  - X86BSD 9y ago
    Like gold and silver?
    - QAPereo 9y ago
      More like TP, antiobiotics, guns and ammunition.
      - blobbers 9y ago

akgerber 9y ago

Relatedly, the Toronto housing market that kept shooting up even as the US hit its 2008 housing crisis now have hit their top: https://www.bloomberg.com/news/articles/2017-09-06/toronto-housing-market-continues-slowdown-with-august-price-drop https://www.bloomberg.com/news/articles/2017-09-06/toronto-h...

tostitos1979 9y ago
Toronto's property market is insane. I am still seeing condos (e.g. Gibson near North York center) being priced at 600K+ for 1+1 and larger units well over 1 million dollars. Not sure who can afford this. Places as far as Vaughan and Milton are expensive. We're talking decent detached houses (slightly above starter home) for over 1 million.
- plaguuuuuu 9y ago
  Sydney is up there as well. A one bedroom apartment in my building just sold for nearly US$900k. This is a nice area, 30 mins from the CBD, but still..
- apexalpha 9y ago
  >Not sure who can afford this. It's just investors selling them to other investors until they, as a collective hive-mind, realise this and then investors will stop buying houses and the price will go down.
- randomdata 9y ago
  Milton is completely understandable given that it grew by 34% in just 5 years[1] and is the sixth fastest growing community in Canada according to Statscan. That is a considerable amount of pressure on existing housing stock. Vaughan gained nearly as many people in absolute numbers, although being larger city means smaller growth as a percentage. [1] http://www12.statcan.gc.ca/census-recensement/2016/dp-pd/prof/details/page.cfm?Lang=E&Geo1=POPC&Code1=0532&Geo2=PR&Code2=47&Data=Count&SearchText=Milton&SearchType=Begins&SearchPR=01&B1=All&GeoLevel=PR&GeoCode=0532&TABID=1&wbdisable=true http://www12.statcan.gc.ca/census-recensement/2016/dp-pd/pro...
- 9y ago

fpgaminer 9y ago

I'm still learning all the tendencies of these macroeconomic trends... So, this should mean mortgage loan rates, savings account interest rates, and inflation are all now on an upward trend. Right? And thus housing prices should begin to curb, since the cost of loans making buying houses more expensive and less appealing, thus lowering demand. (I've already noticed increasing savings account rates and mortgage rates, so it definitely seems like this is an upward trend, though I haven't seen much curbing of housing prices yet)

dredmorbius 9y ago
Correct on housing. Low interest rates tend to increase housing prices. Rising interest rates tend to decrease them. The rent paid on money captures the rent paid to housing owners. It's a bit like a Georgian land tax, except that banks win.
graeme 9y ago
> and inflation are all now on an upward trend. Right? Not inflation. Inflation isn't going up much anywhere. It's a conundrum for central bankers. The old model may no longer work. Normally, when unemployment goes low enough, wages and then prices go up. That hasn't really happened. Instead, house prices (in Canada) and consumer debt are rising.
- surement 9y ago
  > It's a conundrum for central bankers. The old model may no longer work. It is (and has been for a while) the goal of the Bank of Canada to keep inflation between 1% and 3%: http://www.bankofcanada.ca/core-functions/monetary-policy/inflation/ http://www.bankofcanada.ca/core-functions/monetary-policy/in... And it is not doing too bad: https://tradingeconomics.com/canada/inflation-cpi https://tradingeconomics.com/canada/inflation-cpi
  - graeme 9y ago
    They're raising rates while inflation is at the low end of their band. Normally, they wouldn't do that. Or rather, normally inflation would be going up now that the economy is. My point was that inflation and growth/employment may have decoupled. This article expands that argument at length: http://business.financialpost.com/news/economy/the-phillips-curve-is-broken-heres-why-that-is-keeping-economists-up-at-night http://business.financialpost.com/news/economy/the-phillips-...

chvid 9y ago

Zzzzzz - wake me up when they hike it to 10 per cent.

dmix 9y ago

The commonwealth countries are all facing a property bubble (Canada, New Zealand, Australia, etc). The household debt levels and property prices didn't taper off nearly as much following the 2008 US housing crisis and has pretty much continued unabated: http://www.huffingtonpost.ca/stephen-punwasi/real-estate-bubble-commonwealth_b_12385078.html http://www.huffingtonpost.ca/stephen-punwasi/real-estate-bub... Which is fascinating to consider that the Bank of Canada, et al, have let this happen for so long and are only reacting now... By artificially keeping rates near 0% the idea was to 'stimulate' the economy by making capital freely available, so for example, banks can more easily loan money to businesses generating long term economic growth and add new jobs. But the side effect has been that retail banks were incentivized to hand out cheap mortgages and the public was incentivized to speculate on the 'hot' property market. If this bubble doesn't deflate smoothly this will be yet another very expensive side effect of mainstream monetarist policy.

benlorenzetti 9y ago
> By artificially keeping rates near 0%... I agree with your sentiment and artificially is a powerful word for conveying that. But strictly speaking the rate the central bank sets for lending new money is artificial, or fiat, no matter what we decide it should be (So long as it is > 0).
- e_d_e_v 9y ago
  You could set the rate for lending new money algorithmically based on a set of other observed statistics of the credit markets. Then it would not be artificial or fiat. The algorithm might be artificial but the rate itself would not. This is not (to my understanding) how it usually works.
  - benlorenzetti 9y ago
    I would say the rate is still artificial. If windows were the only allowed OS and Linux and Apple users were regularly jailed, I think we would say the price for windows was artificial, no matter if it were set by a government approved algorithm or not. My point is that the connotation we associate with the word artificial varies with our opinion of the legitimacy of the monopoly in question. People who are disinclined toward the federal reserve will read artificial differently from those who think it does a good job.

cthrow 9y ago

Quick summary: Overnight rate directly affects the prime rate, the rate at which commercial banks loan to their least risky customers. In the US, prime rate hovers 3% above overnight rate (federal funds rate). You can see that relationship here: https://fred.stlouisfed.org/graph/fredgraph.png?g=eY9Y https://fred.stlouisfed.org/graph/fredgraph.png?g=eY9Y In basic economic theory, when interest rates go up, the economy slows down. Higher interest rates encourage saving/purchasing safe assets, and make lending/investing in risky assets or new business ventures more expensive. Banks generally make less loans that fuel direct economic activity when interest rates are higher. Context/So What: Canada's economy showed strong signs of growth and low unemployment, so the central bank decided to bump up the interest rate a bit while the data supported the decision to "cool off" the economy. OK, so commercial loan interest rates will rise 0.25%. Not a huge deal for majority of the economy. More importantly, the central bank is slowly gaining back the overnight rate as a tool for monetary policy. Many central banks are unwilling to drop the overnight rate below 0%, effectively taxing banks for the reserves they are usually mandated to hold with the central bank.* If the Bank of Canada can continue to bump the overnight rate up to traditional 4-5% level, it can then cut the rate again to spur economic activity in the case of a downturn. The closer the overnight rate is to 0%, the less effective the rate is as a monetary policy tool. Personally I believe it will be a long time before we see 4-5% overnight rates again, but overall this is a reaction to good economic news. It happened before investors expected, so the markets are buzzing about it a bit, even though the small bump will probably not have a large impact on Canada's economy. *BoC actually has no reserve requirements: http://www.bankofcanada.ca/1997/04/working-paper-1997-8/ http://www.bankofcanada.ca/1997/04/working-paper-1997-8/

refurb 9y ago

This will be very interesting to watch. The Toronto real estate market has already started to correct. Prices are down 20-30% seconds nice earlier this summer. A ton of people eager to buy "before prices go even higher" are getting creamed. Interest rates going up will only make this worse. Hold on tight!!

to_bpr 9y ago
>Hold on tight!! An apt caption for the uncertainty in Toronto introduced by Wynne's last desperate attempts to change people's minds on her.
asdf33323 9y ago
Prices aren't down 20-30% - you're referring to average sales price. Big difference. It's been attributed to the sales mix (people opting for condos/townhomes)
- randomdata 9y ago
  It is also worth noting that there was exceptionally abnormal growth[1] early in the year. The average price for July only brought it back to trend. It will be interesting to see what August numbers bring. [1] http://creastats.crea.ca/treb/images/treb_chart05_xhi-res.png http://creastats.crea.ca/treb/images/treb_chart05_xhi-res.pn...
- myth_drannon 9y ago
  They are. You can check the prices by categories. Detached houses -20%, condos are still holding up. Houses went from 960K to 720K since April
  - asdf33323 9y ago
    read my comment again. sales mix.
  - tostitos1979 9y ago
    Sorry. Your info doesn't match the same reality I live in. As the parent said, sales went down (don't know about mix). Prices for detached homes have not. We were seriously putting offers in March and got outbid for INSANE sums. e.g. 720K offer in Milton .. property went for 100K over. In Mississauga, homes listed for 850K went for 950K-1million. I am looking at data now and it has slowed but not gone down yet.

blobbers 9y ago

Informational note: The notion of fixed rate mortgages does not exist in Canada. You can lock in for about 5 years, but otherwise your mortgage rate floats with prime. If prime rates rise, borrowers can be on the hook for large amounts of defaults as incomes fail to keep up with higher payments. (canadian housing market exhibits higher sensitivity to interest rates)

asdf33323 9y ago
"The notion of fixed rate mortgages does not exist in Canada." ... "You can lock in for about 5 years" what?
- rconti 9y ago
  Mortgages are typically longer than 5 years.
  - tostitos1979 9y ago
    Exactly. In a US 30 year mortgage, it is reasonable to expect a borrower to pay it off. In a 5 year mortgage, you will typically refinance after 5 years (unless you hit the jackpot in the interim).
    - sliverstorm 9y ago
      That sounds obnoxious, being forced to refinance 5 times. Why not a 30 year 5/5 ARM? (Rate adjusts every 5 years to market rate)
- dzdt 9y ago
  In the US, the most standard "fixed rate" mortgage has the rate fixed for 30 years. A mortgage where the rate changes before loan maturity would be called an "adjustable rate mortgage" ("arm" for short).
  - peeters 9y ago

EternalData 9y ago

Are inflationary measures in an age of technological deflation and rapidly shifting consumer baskets still really a valid view into inflation?

emodendroket 9y ago
Have you stopped buying fuel or food?
- EternalData 9y ago
  I don't buy fuel (don't use a car) and aside from the rates set by the electricity provider (essentially a monopoly provider in California) and public transit provider (a city monopoly), fuel costs don't affect me and I actually choose to spend a higher amount with discretion since I moved to the Solar Choice program. Food is such a small part of my discretionary spend (I buy grains in bulk, specifically quinoa, and greens from the farmer's mart). Looking back at my spend, the majority of it is in technology that is undergoing massive deflation, or my pet hobby of collecting rare books (neither of which is accounted for in the basket). I am probably an edge case, but the point remains -- the basket that is set seems outdated. I can't imagine that people are spending as much on food as you think. ex: "USDA data shows that in 2010 Americans spent 9.4 percent of their disposable income on food"

larvaetron 9y ago

> Did you know that your browser (Opera ) is out of date? Erm, thanks... but I'm using Chrome on a Google Pixel?