Tiff Talk

• If you have faith in Canada’s top banker, Bank of Canada chief Tiff Macklem, you needn’t worry about prime rate rising in 2021.
• Here’s what he said in a speech on Tuesday:
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  With a complete recovery still a long way off, monetary policy will need to provide stimulus for a considerable period. We have committed to keeping our policy interest rate at the effective lower bound until economic slack is absorbed so that our inflation target is sustainably achieved. And we have backed up this commitment with our program of large-scale government bond purchases.
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• Those bond purchases have kept fixed rates lower than they otherwise would be. But they will end this year, most likely. CIBC Capital Markets thinks the Bank of Canada “will likely taper its Government Bond Purchase Program (GBPP) at the April meeting.” If that happens, we could see another spurt up in yields (and fixed mortgage rates). Albeit, much of that “spurt” would likely occur in advance of any announcement given that the market always anticipates the future.
• As for why bond yields are shooting up this month, Macklem said, “To some extent, the back up that we’ve seen in rates reflects the success of the fiscal stimulus, the monetary stimulus, combined with the rollout of vaccines.” He added, that it’s a “good thing” that inflation expectations are rising once again.
• These were other Macklem notables from Tuesday:
  • He said the strength of housing has surprised the BoC. “We are starting to see some early signs of excess exuberance, but we’re a long way from where we were, say, in 2016, 2017 when things were really hot.”
  • The Bank is watching home values closely as there is risk that homeowners could become stretched too thin. “What we get worried about is when we start to see extrapolative expectations,” he said. That’s when homebuyers believe that past strength will carry on indefinitely and buy because of it.
  • With the stress test in place, however, Macklem said the BoC is not recommending additional mortgage rule tightening at this time.

Quotable

• “I think that the Bank of Canada will wait for the Fed to move [before hiking rates]…The Bank of Canada is not even dreaming…[of] raising interest rates before the Fed.”—CIBC’s, Ben Tal (via BNN Bloomberg)