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Bank of Canada increases overnight rate target to 1 per cent

bankofcanada.ca

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Re: Bank of Canada increases overnight rate target to 1 per cent

#41

Post by igitur »

latch wrote: post #9

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…

Because they're a good match if you have a nominal (non inflation linked) book of liabilities, eg a pension fund that pays pensions that increase by a fixed rate every year.

Re: Bank of Canada increases overnight rate target to 1 per cent

#42

Post by devrandomguy »

ethbro wrote: post #27
SimbaOnSteroids wrote: post #14

Earlier quoted context omitted.

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.

Because you need somewhere to park $xxB. What are your other options?

Build nation-scale infrastructure? Surely a major bank would benefit greatly, if indirectly, from any improvements in the national economy.

Re: Bank of Canada increases overnight rate target to 1 per cent

#43

Post by 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...

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.

Re: Bank of Canada increases overnight rate target to 1 per cent

#44

Post by 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

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/

Re: Bank of Canada increases overnight rate target to 1 per cent

#45

Post by graeme »

fpgaminer wrote: post #39

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,…

> 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.

Re: Bank of Canada increases overnight rate target to 1 per cent

#46

Post by 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!!

Re: Bank of Canada increases overnight rate target to 1 per cent

#47

Post by betaby »

cpncrunch wrote: post #36
betaby wrote: post #12

Earlier quoted context omitted.

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.

>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…

> 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).

They don't, that's why. In contrast variable mortgages and credit card rates are explicitly tied to the prime rate.

Re: Bank of Canada increases overnight rate target to 1 per cent

#48

Post by RobertoG »

cpncrunch wrote: post #36
betaby wrote: post #12

Earlier quoted context omitted.

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.

>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…

"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.

Re: Bank of Canada increases overnight rate target to 1 per cent

#49

Post by [deleted] »

[deleted] wrote: post #30
IBM wrote: post #23

Earlier quoted context omitted.

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-...

[deleted]

[deleted]

Re: Bank of Canada increases overnight rate target to 1 per cent

#50

Post by blobbers »

QAPereo wrote: post #24
X86BSD wrote: post #22

Earlier quoted context omitted.

Like gold and silver?

More like TP, antiobiotics, guns and ammunition.

If TP made it to the top of your list of useful things in a societal meltdown, you need to spend a bit more time roughing it.
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