Observers weigh in on the BoC’s possible next steps

In its forecasts released last week, the Bank of Canada expressed uncertainty about the degree the new federal mortgage rules will slow down the housing segment—a stance that has raised questions as to what steps the central bank will take next.
 
Scotiabank economist Derek Holt argued that Governor Stephen Poloz’s statements revealed that the BoC now strongly favours lower rates, as these won’t upset the real estate markets further.
 
“What the BoC may be implicitly assuming is that the rate sensitivity of the mortgage book has been dropped to around zero in the wake of the tightened mortgage rules,” Holt wrote in a report, as quoted by the Financial Post.
 
“Therefore if they cut, the easier monetary policy conditions won’t be transmitted to mortgage borrowers,” Holt said. “Rates matter to the currency. They likely also still matter to the mortgage book.”
 
Charles St-Arnaud of Nomura Global Economic agreed that the BoC’s stance “should be viewed as dovish, not hawkish,” but added that any stimulus to the Canadian economy will be made not through rate cuts but through fiscal policy.
 
On the other hand, Nick Exarhos of CIBC World Markets cautioned that “further policy easing” might not be too far off.
 
“The measures related to housing are said to ‘mitigate risks’ to the financial system, while at the same time posing a risk to growth,” Exarhos said. “As a result, the Bank has altered its view on what housing risks mean for the rate outlook, with greater attention paid to growth implications rather than financial stability.”
 
Meanwhile, Paul Ashworth of Capital Economics stated that any major housing market correction would trigger a rate cut (down to 0.25 per cent) next year. David Doyle of Macquarie Research agreed with the possibility of a cut in the same time frame, revising his earlier prediction of the central bank maintaining the rate until 2019.
 
“Rhetoric suggests more stimulus is on the table,” Doyle said.
 

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