Calling trust in BoC into question

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The biggest news wasn’t the rate cut; it was the way in which the central bank implemented it – and what it may signify for future interest rates, according to one industry leader.

Canadian financial services industries were abuzz following the Bank of Canada’s announcement that it was lowering its overnight rate, speculating about what it would mean for Canadian borrowers. And the biggest news may not be the that it was the first such change in over four years but that it caught so many people off guard.

“Part of the significance of the announcement by the Bank of Canada is not the rate announcement but the fact that they surprised the markets in doing it, which would lead us to believe that there could be further shocks to the system,” Calum Ross of Verico Calum Ross Mortgage told MortgageBrokerNews.ca. “I don’t think further rate cuts are out of the question when they surprise us with this.

“It’s uncharacteristic for a central bank to surprise the market – the very basis of stability of a financial system is about maintaining the trust and not having surprises happen.”

In the wake of plummeting oil prices, some suspected the central bank was poised to axe its overnight rate target. It was the first rate reduction since April 2009.

Many were caught off guard.

According to a Bloomberg news article about the rate cut, none of the 22 economists who took a Bloomberg news survey predicted a rate cut.

“We’ve seen that things can (change) quickly,” Gord McCallum of First Foundation told MortgageBrokerNews.ca. “Who knows what’s in store – like you said, a lot of the predictions have been wrong.”

And it isn’t just brokers crying foul.

“Never, ever listen to a central bank, because they will use you and abuse you,” Eric Green, head of U.S. economic research at TD Securities in New York told the Financial Post.

Related:
Brokers discuss the future of rates
  • Tony Piattelli on 2015-01-23 11:32:17 AM

    Not sure what all the fuss is about, as there never should have been a rate increase when Mark Carney raised the BoC rate by 1/4% point to 3% in the first place. This is just putting the rate where it should have been.

  • Sami Bin Saad on 2015-01-23 11:43:13 AM

    Surprisingly, banks haven't followed suit, which defeats the very purpose for which the rates were reduced in the first place ie, help boost economy with lower interest rates. Oddly, the banks like RBC have immediately reduced interest its pays on GICs but not reduced interest it charges on lending. Its akin to "double-dipping".

  • Kevin R on 2015-01-23 11:55:57 AM

    Cmon Sami! Banks & Government are the best of bedfellows. You cant tell me the Finance Minister of Canada has been tightening mortgage lending, taking away programs & making it that much tougher to qualify the last how many years in the name of a "Housing Bubble" & too much Canadian debt, to shift gears now. The rates have been great for a long time, there is no need to drop rates further to facilitate activity in the Real Estate market. Just bring back 30 & 35 year amortizations to high ratio mortgages, bring back some of the different programs that fell by the wayside. The reason & only reason the Fed dropped the BoC rate is to drop the dollar to offset the plummet of Oil prices. The bonus for the Banks to come across as the bad guys again is there will be hundreds of millions of dollars extra profit for the Banks by not passing on the savings to Canadians. The Feds do not want this rate cut or any future cuts (we may see another) passed on to Canadians. End of story.

  • Vince Gaetano on 2015-01-23 11:58:33 AM

    Were many economists caught off guard or were they simply complacent? The price of oil is reported daily in the news and this major economic metric has dropped 50% in a short period of time....what is the surprise? I don't see thousands of Tesla's on the road where the price of oil and its impact is insignificant.

    The Bank of Canada did its job. This is far from a trust issue.

    The real issue is why has TD Canada Trust not dropped their prime rate? They have kicked seniors in the teeth by dropping the rate on the investment savings account by 0.25% from 1.25% to 1.00%.....a 20% reduction in interest earned. Someone should follow that story.....

  • Tony Piattelli on 2015-01-23 12:16:18 PM

    Hi Kevin,
    Not sure whether you are correct as both the drop in oil prices and the drop in the BoC have the same impact on the Cdn $$, so no they didn't drop the rate to offset the drop in oil prices as they both cause the Cdn $$ to generally move in the same direction. This economics 101

  • Susan Zanders on 2015-01-23 12:24:24 PM

    I think the biggest question is why lenders are not reflecting this in their variable rate mortgages. After all that was the sell from the lender on that product. It appears to be another .25% profit in for the banks. Are they all going to hold solidarity and not reduce. A monopoly? Seems like they are fast enough to reduce interest paid to the consumers. We already had clients phoning questioning why TD is not reducing and if they can move their mortgages. Seems like consumer sediment is not positive towards them.

  • Steve Clark on 2015-01-23 12:56:20 PM

    The Bank of Canada did warn anyone who cared to listen over the past 12 months and during an address to the Economic Club in NYC on Dec.10. In his speech Mr. Poloz said, "some financial vulnerabilities appear to be edging higher. That is why we continue to believe that the overall balance of risk remains within the zone for which our current stance of monetary policy is appropriate."
    His stance at the time was appropriate however he warned the vulnerabilities were edging higher. They edged even higher as gas prices, the inherent tax revenues and inflation dropped. He has responded in the only logical way possible before we head into another recession. I think I am more put off by the reporter's headline than casual observations made by commenters to the article. Trust is not in question. The BoC does not listen to banks, who's only concern is profit. It has no other axe to grind other than the economy of Canada. Yes there is a possibility of more "surprises" but not if you actually do read
    the statements on monetary policy available on the BoC website. More research and less rhetoric please.

  • Sami Bin Saad on 2015-01-23 1:11:35 PM

    Tx Steve for your insight. Tx Kevin for disagreeing with me - you have put in very compelling argument. However, interest rates not only affect mortgages, it also affects millions nay, billions of $s that corporations borrow. Whenever there's a change in interest rates, it directly affects major corporations that borrow massive amounts of $. The Prime rate impacts all borrowers across the board - mortgages, consumer as well as corporate borrowings. The idea of BoC reducing rates was to induce borrowing (as it becomes cheaper for corps to borrow) & thus enhance economic activity. Banks, by not following the BoC line, have negated the very purpose for which rates were reduced. I rest my case.

  • Paul Therien - CENTUM on 2015-01-23 1:30:49 PM

    Predicting the marketplace is akin to having an accurate forecast of the weather, it is at best challenging. In 2007, and right up until early 2008 economists were predicting a continued rise in consumer confidence and economic growth. There were some estimations that the market may cool, but very few predicted a total collapse that would result in a worldwide recession that many countries are still struggling to recover from today.

    Almost every economist around the world was shocked when OPEC announced that they were not going to curb oil production. It was unfathomable that they would intentionally do this knowing that it would heavily drive down the price of oil. They did do it however, and it is a critical item relative to the decision of the BoC to either maintain or lower their prime rate.

    It has to be considered that Canada’s current government has relied very heavily (too much so) on oil to provide strength to our economy. In fact they have relied on oil revenues more than any prior government. The result of which has been an economy that is less diversified than before and that means that we are far more exposed to market changes in limited sectors. If you consider that there is deepened concern regarding the impact oil will have on the economy nationally should the suppressed price per barrel remain long term, this positioning by the BoC is not really much of a surprise. These lower rates will drive business in other sectors, as will a lower dollar. Something that is painfully necessary given the expected rise in unemployment as an effect of lower oil prices (potentially 5000 layoffs in just Alberta in the next 6 months alone).

    We, in the Real Estate and Mortgage industry, have been all too aware of the issues surrounding affordability of property in some Canadian cities. We are also very much aware of the rather significant impact our property market has on the national economy. A soup made of high levels of debt, higher interest rates, and unemployment levels rising does not bode well. We only have to look to the late 80’s and the 90’s to see the results. Our government has limited control over certain things, like the price of oil. What they can control is the rate of interest and mortgage lending guidelines. By maintaining, or reducing, borrowing rates they can hope to partially offset the impact that we will see with the economy. Or at least that is the hope. The last thing Canadians need at this time is interest rates increasing to cause worry over their ability to meet their mortgage and debt obligations.

  • Kevin R on 2015-01-23 1:43:12 PM

    Toni, this isnt about economics 101. It's about how quick & far the price of Oil has dropped. Of course lower Oil Prices will have a downward impact of the $$. So here's the conundrum, it wasnt that long ago that we were on that economic bubble watch & huge concerns of increased debt for Canadians. Do you disagree with this? The Fed took extensive measures to pull the carpet out of the feet of the mortgage/real estate industry. Quite simple, they want fewer Canadians buying homes & qualifying for mortgages. I & any Mortgage Broker can give you pages of examples of the lost income we have experienced from perfectly good deals we were able to get done 3-4 years ago & cant today. Yet the Fed did not increase rates. Why? Economics 101 would say if you have an inflated heated economy with too much spending, bubbling real estate & increasing consumer debt, what do you do? You increase rates. But you know & I know that Economics 101 really doesnt apply to a globally economically volatile linked environment. Rest assured, there are federal regulatories gunning after the "Bubble" auto industry & you will be seeing fewer Canadians being able to afford these $80000.00 SUV's. But there was no intention of increasing rates.

    This BoC reduction goes against the philosophy of what we has been getting jammed down our throats by the Finance Minister. But the potential loss of Government Revenue & potential loss of jobs in Canada from the alarming rate of the drop of Oil required additional action by the Fed to accelerate the drop on the Canadian greenback. Who knows how low the Fed will allow the dollar to plummet. But the benefactor of a low $$ is the Canadian Oil Industry. So I'm just having fun spinning the conspiracy theory of the Fed being behind the reason the Banks not passing that savings in the BoC rate on to the consumers. It's not like the Banks were hurting that badly on their quarterly Billion $$ profits. But what do I know, Ive been doing this Finance/Lending stuff for 30+ years & the last time I took Economics 101 at University was 33 years ago.

  • M. Robertson on 2015-01-23 1:51:17 PM

    Paul, Kevin - thank you for your reasonable and level headed responses to this article and the reactionary comments from some. It is a relief to know that we have people of your caliber and thoughtfulness in our industry.

    You exemplify professionalism and quality for all of us and make me proud to be a part of this industry.

  • Tony Piattelli on 2015-01-23 1:53:12 PM

    Hi Kevin,
    The primary reason the BoC didn't raise rates re overheated economy is because it wasn't overheated to the degree necessary. Additionally, the global economy has been in a tailspin since the US dumped all their crappy debt onto the world markets causing this 14 Trillion loss being absorbed. Essentially, the world economies were too fragile to implement any rate increases due to the impact this would have on the Cdn $$ as it would have priced us out of the market place. Additionally, with this bludgeoning debt load, most of the increase came from changing the calculation on how to determine the debt ratio versus people actually increasing their debt load. This jump went from 152% to 163%. I also agree that most of the debt issue has to do with unsecured debt not mortgage debt, and the tightening of mortgage lending rules is completely unnecessary and being pushed through the media to make us believe it's essential to the survival of the marketplace. The only thing that going to come out of all of the OSFII changes is a greater chasm being created between the upper middle class and the middle class in Canada, as rental properties are no longer available to many Canadians as an investment strategy due to how we now need to calculate the debt ratios which doesn't even reflect reality. This is a sad state and will have longer term ramifications to the overall economy than what the brains in OSFII have anticipated.

  • Paul Therien - CENTUM on 2015-01-23 2:13:21 PM

    Tony, Actually if you look at the current mortgage lending rules and compare them to pre-2003 rules they are still less significantly restrictive. For those that have been in the industry for more than 15 years, you are all too familiar with the truth of that. That is I know very little comfort for people who have not had the experience, and given the change in affordability even less comfort. Understand however that those lax rules did have a strong impact on the growth of the real estate market – for good and bad.

    In regards to debt levels, again there is a misconception in our industry regarding debt and how it is regulated and managed. The government does not have the ability to so easily debt which is not secured against property because it is uninsured balance sheet lending. They (the gov’t) can only impact mortgage insured lending because of the NHA and the fact that they provide government guarantees against loss on mortgages. This same provision is not provided on consumer lending.

    Furthermore, the levels of unsecured debt are not the largest culprit in the increase in debt levels, they represent a rather small portion of debt when compared to mortgage lending.

    The additional challenge with fully understanding debt a is that not all lenders report HELOC's as mortgages, many of them report it as consumer lending because it is a revolving line. Additionally with programs like Scotia's STEP, Manulife One account, etc. there is more and more traditionally unsecured debt being secured against a property allowing lenders to hedge against the values of property. Credit cards and lines of credit under these programs do not report on the credit bureau as mortgage debt, they report as unsecured. This is one reason why the government restricted the ability to insure HELOC lending and there has been a surge in the STEP and ONE type of products.

    It is easy to point to consumer debt as the culprit, but it is important to consider what and how those debt levels are defined based on self-reporting conducted by lenders and how they are reported to credit bureaus. In recent months we have actually seen the levels of credit card debt decline as Canadians refocus on paying down their debt and increase their savings. Albeit it may show negatively with consumer spending in the short term it is a positive move for the general long term stability of consumer confidence and its impact on the economy.

    Mortgage brokers are resilient and provide highly valuable service to Canadians by giving them something that during these economic time they desperately need. Advice and options. So long as we can continue to provide this professional service I believe that the consumer is well served and will have the tools needed to better deal with economic change.

  • Tony Piattelli on 2015-01-23 2:34:45 PM

    Thanks appreciate the feedback and you are 80% correct regarding the lending rules. Back in 2003 the average middle class still qualified for a rental property, where as most don't, so no, they aren't less restrictive per your comments. I too used to work in the banking world during the 80s as an underwriter/manager with an economics degree. Also of note, the insurers should never have gotten into the rental market let alone go for the 0 down.

  • Paul Therien - CENTUM on 2015-01-23 3:58:30 PM

    Tony they are still less restrictive than they were pre 2003. LTV uninsured is 79.9% vs 74.9%, Max GDS and TDS were 32/40 for all insured vs 39%/44% (if you look at the previous guidelines there were no exceptions allowed to 32/40).

    Rental property allowances were not relaxed until 2000 - 2001, and they were only allowed to own one investment property under insurance.

    BFS were required to provide three years of audited financial statements for the company as well as their own personal income statements.

    All of that said, this does not mean that should be any comfort to what people are experiencing now. It is not productive for a government to wind back lending guidelines significantly then hit the panic button and wind them back. It creates undue hardship and a prudent policy would have been to take a more measured approach from the start when they were expanding the parameters.

    The point is, people will still buy homes and they will still have need of mortgage financing. If it takes a customer longer to save or to hit the point of affordability, that is a challenge for our industry but it will not remain so as people start to catch up to requirements in terms of getting used to what they are required to provide or need to qualify.

Broker news forum is the place for positive industry interaction and welcomes your professional and informed opinion.

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