Rate hike on top of rule changes?

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The move to again switch up mortgage rules has helped the central bank out of a tough spot, say analysts, although Mark Carney isn't ruling out a rate hike if necessary.

“Some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the two per cent inflation target over the medium term,” the Bank of Canada governor said on the heels of last week’s announcement. “The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.”

The words reiterate the bank's position from its last review statement earlier this month, but have surprised brokers still reeling from the government's move to introduce more stringent mortgage rules.

Most had hoped the lower amortization cap and refi LTV would prevent the central bank from raising its overnight rate.

Carney isn't making any such promise, although has come out in support of the government intervention.

“The No. 1 domestic risk to the Canadian economy is the potential for household finances to evolve in an unsustainable fashion,” he told Halifax's business community. “These measures reduce the No. 1 domestic risk.”

The position is understandable, say economists – both for and against last week’s government intervention – given the Bank of Canada’s current inability to adjust interest rates.

The bank has been hamstrung by global economic uncertainty in Europe, which threatens to scuttle Canadian recovery, now virtually stalled, say analysts. That precludes any BoC move to raise its overnight rate and effectively remove the economic stimulus Carney still sees as necessary.

Ironically, lenders may, in the short-term, move to lower their fixed interest rates in order to compete for the reduced number of clients able to qualify after new mortgage rule take effect July 9.

That could spark another round of the rate wars for brokers as they look to mono-lines and other channel lenders to fight the big banks for market share.
 

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