
Bank of Canada increases overnight rate target to 1 per cent - lpgauth
http://www.bankofcanada.ca/2017/09/fad-press-release-2017-09-06/
======
dmix
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-bub...](http://www.huffingtonpost.ca/stephen-punwasi/real-estate-
bubble-commonwealth_b_12385078.html)

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.

~~~
kitcar
I believe the official stance of the bank of Canada is inflation is below
target hence the low rates being acceptable for so long.

What I don't understand (and I hope someone can shine some light on!) is the
basket of goods they use to measure inflation doesn't seem to be very impacted
by low interest rates - therefore how will the low rates increase inflation?
i.e. banks will only lend to me at below 5% if I'm buying fixed assets like a
house - which isn't included in the inflation measure. If I want to borrow to
buy groceries, gas, or the other things they measure for inflation I would be
borrowing at >19.99%. Therefore all low rates does is cause the price of fixed
assets to skyrocket. But those assets are tremendously difficult to convert
into consumer spending - i.e. You sell your now inflated house, but rather
then spending that "profit" (due to the value of your house increasing) on
more groceries and gas most people just roll it into another expensive house
as they gotta live somewhere. I guess ultimately there will be a trickle down
where everything will get more expensive, but seems like it would be a very
long process...

~~~
jpdaigle
Another thing I don't understand about the basket of goods approach to
measuring consumer prices is how we're getting inflation figures which are so
low. Since goods we buy priced in USD have gone up massively in 2-3 years due
to a falling Canadian dollar (electronics, smartphones, computers, SaaS,
etc.), the only way the basket stays at 2% YoY growth is if that's offset by
other things falling in price.

But, anecdotally, home services, energy cost, health services, food and
clothing are _all_ more expensive now than a few years ago, the only exception
I can think of off the top of my head is gasoline, which has fallen.

Edit: This StatCan paper
([http://www.statcan.gc.ca/pub/62-553-x/62-553-x2015001-eng.pd...](http://www.statcan.gc.ca/pub/62-553-x/62-553-x2015001-eng.pdf))
explains CPI in detail and it seems like the basket is thorough and well-
thought-out. Appendix B outlines all the components and their weights, and
both homeowner costs, rents, and mortgage interest costs do factor into the
shelter calculation.

~~~
maerF0x0
The cynic in me suggests that the basket might intentionally be chosen to hide
the fact that the cost of living is going up. Lots of people with money have
incentives for inflation numbers to be low. ex: COLA raises are common and
benefit if the CPI hides the true costs

Ex2: many government benefits are tied to "inflation" . If your personal
basket inflates faster than their example basket then they can get away with
paying you less than promised (in spirit).

~~~
guelo
I do not appreciate random unfounded conspiracy theories like this comment.

------
latch
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
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.

~~~
lmm
Government bonds are seen as ultra-safe, comparable to cash, and while 2.2% is
not great it's better than 0%.

Maybe they think inflation will stay low. My sense is that at the moment
there's a lot of money sloshing around chasing not-so-great returns, so
returns on everything are low - capital is subject to supply and demand like
anything else.

~~~
JshWright
> Government bonds are seen as ultra-safe, comparable to cash, and while 2.2%
> is not great it's better than 0%.

And much better than anything < 0%.

~~~
oculusthrift
swiss and some german bonds have been known to sell for negative yield because
losing a small gauranteed amount is better than losing a lot

~~~
KekDemaga
How would you lose value in cash in a way that you wouldn't with a bond?

~~~
rjtavares
When you're talking about billions:

If you hold it physically, you have to store it and secure it, which costs
money.

If you deposit it in a commercial bank, it'll be less safe than German bonds.

~~~
SilasX
Wait, what? Isn't most money electronic anyway? How does it cost (O(n)) money
to keep an entry in a digital record?

~~~
pjc50
> keep an entry in a digital record

A record where, though?

Bank "clearing" means that ultimately a bank is keeping its money either with
other banks or with the central bank. They're records, but not necessarily
interest-bearing, and keeping it with other banks is _not_ risk-free.

~~~
SilasX
How about keeping it with the central bank?

~~~
rjtavares
ECB deposit rates are also negative.

[https://www.ecb.europa.eu/explainers/tell-me/html/what-is-
th...](https://www.ecb.europa.eu/explainers/tell-me/html/what-is-the-deposit-
facility-rate.en.html)

------
make3
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/ke...](http://www.bankofcanada.ca/core-functions/monetary-policy/key-
interest-rate/)

~~~
delinka
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
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.

~~~
IBM
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-...](http://www.bankofcanada.ca/2015/10/overnight-repo-overnight-
reverse-repo-operations/)

------
blobbers
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)

~~~
pycal
In Canada, banks offer fixed and floating rate mortgages; the mortgage rate is
always prime + some %.

If you get a fixed-rate mortgage, you're locked in to your rate for 5 years
regardless of how the Bank of Canada changes the prime rate. This has been the
product of choice for Canadians for the last several years because it protects
you against rising interest rates, and rates have had nowhere to go but up.

If you get a floating-rate, your rate moves when the Bank of Canada moves the
rate. This is desirable if you think the BoC is going to lower interest rates.

Self-plug - I made a tool to look at how sensitive your monthly mortgage
payment is to movements in interest rate: [https://pycal.github.io/real-time-
ammortization/](https://pycal.github.io/real-time-ammortization/)

~~~
emodendroket
Yeah, but locking in a rate for 5 years is so different from locking it in for
30 that it seems kind of misleading to say "both places have fixed-rate
mortgages." I'm actually a little unclear on the specifics here; is it that
you have a balloon payment and the typical thing is to get another, smaller
loan to pay that off?

~~~
goodcanadian
Technically, yes, you are on the hook for a balloon payment. In practice,
however, you would get a new mortgage for the remainder owing. You can, of
course, be screwed in the event of rising interest rates or collapsing
property values.

Unlike the US, there are hefty fees for early payoff of the mortgage, so if
you were in the position to pay it off, you would probably want to wait until
the end of the current mortgage (depending on lots of different factors, of
course).

~~~
emodendroket
OK, got it. Frankly, it seems like a system that makes owning a home less
attractive, but I suppose US policy has been driven by the idea that home
ownership should be encouraged.

~~~
goodcanadian
Other differences: Canada does not have a mortgage interest tax deduction nor
does it have low/no down payment mortgage options. Generally, the more
conservative approach to banking makes things more sane and is part of the
reason that Canada rode out the global financial crisis relatively unscathed.

~~~
emodendroket
Well, it also makes people less likely to own homes, and I'm not really
convinced you couldn't have a relatively cautious system that still had long,
federally backed mortgage terms or tax deductions or even relatively low down
payment options. The big crash was preceded by lots of outright fraud.

~~~
goodcanadian
I got curious, so I did a google search. It appears that the home ownership
rate is very similar between Canada and the US. At the moment, it is higher in
Canada as the US is still recovering from the effects of the mortgage crisis.
That said, I don't disagree with you. The US has made a policy of promoting
home ownership, more so than other countries. That has potentially come with
adverse side effects. On the other hand, Canada's relative banking
conservatism has arguably prevented Canada's own housing bubble from bursting
which could be, itself, a bad thing.

~~~
emodendroket
I wouldn't have guessed the rates would be similar. That's interesting.

------
akgerber
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-h...](https://www.bloomberg.com/news/articles/2017-09-06/toronto-
housing-market-continues-slowdown-with-august-price-drop)

~~~
tostitos1979
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.

~~~
52-6F-62
It's just as bad or worse downtown. I rent in Liberty Village (paying a
blessed 300 dollars a month below market and crossing my fingers it stays that
way for now), and around here studio units can start in the mid 500's. The
larger units easily run upwards of 2 - 4 million dollars if you go for the
trendier, older buildings like the old Irwin Toy factory.

Rents are feeling it as well. I think the numbers just came out yesterday or
today and an average 1 bed is about $1950. I've seen one bedrooms rent in this
neighbourhood for upwards of $4000 a month -- again for the trendier
buildings. And this is by no means the upper limit.

I remember approximately 2 years ago, when the average attached houses in the
downtown were ~600k (usually 2 or 3 bed, kitchen, living, dining, basement,
yard, garage). They hardly exist for anything less than 950k

Back then the average 1 bed rented for 1200 - 1500 a month. That's a long lost
dream now.

------
refurb
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!!

~~~
asdf33323
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)

~~~
myth_drannon
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

~~~
tostitos1979
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.

~~~
refurb
Real estate is local. I've seen multiple listing in the Toronto area, SFH,
that haven't sold and are delisting at 20-30% below comparables from 3 months
ago.

~~~
asdf33323
I call BS unless you provide proof.

~~~
megaman2
Unless I'm reading the reports wrong, according to the Toronto Real Estate
Board (TREB) the average price of a detached housed in the "416" (Toronto)
area in July 2017 was $1,304,288. In August it was $1,191,052.

So that means a -8.7% change from July to August alone.

Numbers for recent months - Detached houses in "416" area code: August:
$1,191,052 July: $1,304,288 June: $1,386,524 May: $1,503,868 April: $1,578,542

[http://www.trebhome.com/market_news/release_market_updates/n...](http://www.trebhome.com/market_news/release_market_updates/news.htm)

~~~
acchow
You are talking average selling prices going down.

We are asking about examples of actual prices of homes going down. They are
not the same thing.

The price of homes can actual stay flat or even go up while the average sold
price goes down.

~~~
megaman2
Yeah, I get that - I was responding to a comment above about the "sales mix"
between detached, townhouses, and condos. The data I referenced directly
contradicts the assertions made above that the price declines were due to
shifts in the "sales mix" between those three types of homes. Sure, you could
argue that the prices declines were shifts _within_ the detached housing
market, but I haven't seen anyone provide data on that.

------
cthrow
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/)

------
fpgaminer
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)

~~~
graeme
> 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
> 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/in...](http://www.bankofcanada.ca/core-
functions/monetary-policy/inflation/)

And it is not doing too bad: [https://tradingeconomics.com/canada/inflation-
cpi](https://tradingeconomics.com/canada/inflation-cpi)

~~~
graeme
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-...](http://business.financialpost.com/news/economy/the-phillips-
curve-is-broken-heres-why-that-is-keeping-economists-up-at-night)

------
Slurpee99
[http://www.ctvnews.ca/bank-of-canada-raises-overnight-
rate-t...](http://www.ctvnews.ca/bank-of-canada-raises-overnight-rate-
to-1-per-cent-1.3576893)

> 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.

------
JamesCoyne
Previous rate was 0.75%

------
IB885588
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
A hike was expected, but many believed it'd be another month or two, and as
such was surprise to many.

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

~~~
emodendroket
Have you stopped buying fuel or food?

~~~
EternalData
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"

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

------
levesque
So what exactly does this entail?

~~~
betaby
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.

~~~
cpncrunch
>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).

~~~
RobertoG
"the difference between the two gives the bank their profit"

I don't think this is true. Banks don't lean the money from the deposits.

About, why banks shouldn't increase saving accounts interest, the answer is,
of course, profit. They would avoid that so much as possible.

~~~
cpncrunch
>Banks don't lean the money from the deposits.

Credit unions do, and banks have to compete with them. Also, CIBC's chief
economist says "Recent history suggests an increase to the overnight rate will
translate into a corresponding increase in interest earned from savings
accounts", so I think I'll take the word of CIBC's chief economist over an
anonymous HN user :)

>About, why banks shouldn't increase saving accounts interest, the answer is,
of course, profit.

Credit unions will increase rates, and if banks don't they'll lose profit.
That's business 101, and it's why all gas stations have virtually the same
price.

------
larvaetron
> Did you know that your browser (Opera ) is out of date?

Erm, thanks... but I'm using Chrome on a Google Pixel?

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

