Borrowing costs should remain low
With Canadian residential real estate prices hovering at near record levels, sector stakeholders are keeping a close eye on the Bank of Canada's upcoming interest rate decision, to be announced October 23rd.
The central bank, led by Stephen Poloz, who took over as governor this summer, has been maintaining its policy rate at close to zero for some time. However, the affordable mortgages that Canadians benefit from are so crucial to supporting residential real estate prices, there will nevertheless be tension in the air as that date approaches.
Bank of Canada seeks balance
The Bank of Canada balances its approach between the twin goals of fostering price stability and economic growth.
On the face of it, progress on the latter front looks good. According to the Statistics Canada, 11,900 jobs were created in September, more than analysts expected. This brought the country's unemployment rate down to an enviable 6.9 per cent, far below the 7.3 per cent south of the border.
Canadian stocks have also been doing well. The S&P/TSX rose by 2.84 per cent during the first nine months of 2013, excluding dividends, a steady pace for the current low inflation environment. Output also turned around in July, rising 0.6 per cent, reversing a setback the previous month.
U.S. influences Canadian rates
That said, the Bank of Canada will be constrained by actions at the Federal Reserve Board. Ben Bernanke, its chairman, surprised almost everyone recently when he announced that the U.S. central bank would not begin winding down its massive quantitative easing bond-buying program, which has been putting downwards pressure on mid- to long-term interest rates.
Those low U.S. interest rates leave little room for Poloz to raise rates here, because if he does, the Canadian dollar will soar, which would make it harder for exporters to sell goods abroad.
It's important because earlier this month the International Monetary Fund cut its growth forecast for the Canadian economy for this year and next, to 1.6 per cent and 2.2 per cent, respectively, down one tenth of a percentage point for both years.
The IMF noted, however, that weaker growth in China, India and Mexico, is unlikely to affect Canada, despite the fact that it remains heavily dependent on raw materials and energy shipments to those growing markets. A rising dollar could throw a wrench into that projection.
Behind the numbers
Canada's job numbers mask another bleak reality: the falling unemployment rate is in part due to the fact that many people have given up looking for work. In Canada alone, 25,100 of them threw up their hands in September, bringing the labour force participation rate down by two-tenths of a percentage point to 66.4 per cent: A more than 10-year low.
"The results will have little impact on Canada's economic outlook and expectations concerning changes in monetary policy," says Benoit Durocher, a senior economist at Desjardins, Economic Studies.
Residential real estate stakeholders hope Durocher is right, because if interest rates rise too soon, housing prices could move in the other direction.
Peter Diekmeyer is Bankrate.ca's economics columnist. He can be reached at email@example.com