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Bank of Canada increases overnight rate target to 1 per cent

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

#91

Post by School-Cotton »

SilasX wrote: post #88
lurker456 wrote: post #82

Earlier quoted context omitted.

The odds of a commercial bank going bust is higher then Germany going bust. Commercial banks only need to keep a few % of the money deposited at them on their books (its called fractional reserve banking), the other 95% or so can be invested or lent out elsewhere. There are regulations that restrict the risk, require hedging, insurance, etc but those don't help much if the insurer or a significant amount of the borro…

Banks are allowed to loan out the money, but they don't have to , and could take business from the negative-yielding government bonds by just leaving the money alone, in their electronic reserve account.

Then where is the bank supposed to keep their money? In another commercial bank? In cash? This creates an infinite regression problem...

They could keep it in the Fed, but the Fed charges money for the privilege (and I assume so does the ECB and other equivalents)

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

#92

Post by cthrow »

pishpash wrote: post #75
cthrow wrote: post #52

Earlier quoted context omitted.

Alternative in 2008 was to let the banking system collapse, then rebuild from scratch. Personally I believe many older/sick people would have died if central banks hadn't dropped interest rates and embarked on QE asset purchasing schemes to keep the system afloat. Credit/lending would have all but disappeared for a while, many would have lost access to financial instruments necessary to secure housing, healthcare, in…

Dropping interest rates, backstopping systematically important institutions during the immediate crisis, and even the first QE were arguably necessary. The subsequent QE's and eight years of 0 interest rates were not.

While it's easy to blame CB's for the past 8 years of stagnation in developed economies, I don't think it's their fault. It's also very hard to say what exactly is the right amount of repurchasing through QE (1.3T in QE1 vs. 4.5T total).

CB's just kept repurchasing until unemployment bottomed out, and now that we've hit the bottom, they will start to shrink their balance sheets. That's their mandate - maximize employment, keep consumer prices relatively stable.

All CBs can really do is make sure banks have enough money to lend into the economy by adjusting reserve requirements and interest rates. They could massively screw up the economy by jamming interest rates up right now, or dumping all their purchased QE assets back on the market, but they can't really improve the economy strictly through monetary policy.

That would require better fiscal and regulatory policy, such as tax code reform, increased spending on R&D and infrastructure, spend on education, etc. Even then it's not guaranteed this spending would lead to any technology-advancing breakthroughs that could raise the standard of living across the economy.

Ultimately I believe that low productivity (we've hit a ceiling on the returns to the internet, computer, and smartphone for the moment), plus a lot of the rest of the world catching up in terms of infrastructure, is to blame for the stagnation.

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

#94

Post by betaby »

cpncrunch wrote: post #60
betaby wrote: post #47

Earlier quoted context omitted.

> 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.

>They don't, that's why Reference? See my answer to RobertoG for more details.

That answer is incorrect. Bank can and will loan money they do not have http://www.investopedia.com/articles/investing/022416/why-ba...

Neither there is a connection of saving account returns and discount rate. In contrast connection of the discount rate and CC rate is explicit http://hudsonsbaycredit.capitalone.ca/docs/Hudson_Bay_Cardho... very first page.

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

#95

Post by 8ytecoder »

kitcar wrote: post #51
dmix wrote: post #43

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…

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 buyin…

As an example - if I get to reduce my mortgage payment by $500 - because interest rate is extremely low - I could technically spend that money on upgrading my car or travel or groceries or eating out - and so pushing up the price. At least that's how I understand it. I assumed that housing prices were included but apparently not (at least in the US)[1]

[1] http://www.nytimes.com/2011/04/02/business/02charts.html?mcu...

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

#96

Post by emodendroket »

pycal wrote: post #77
blobbers wrote: post #53

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)

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 g…

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?

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

#97

Post by caoilte »

nickik wrote: post #85
dmix wrote: post #43

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…

I'm sorry but you seem to have no idea about the what and why of montary policy. A central bank has to conduct montary policy for the economy as a hole. Attempts by central banks to 'clamp down' on bubbles have generally been catastrophic. Also the low interest rates are simply not just 'artefically low' because of central banks. The montary effect of the interest a central bank sets is determained by the difference…

> A central bank has to conduct montary policy for the economy as a hole. Attempts by central banks to 'clamp down' on bubbles have generally been catastrophic.

Which is why Central Banks don't make sense as independent arms of Government.

Bubbles are very very dangerous (as we all discovered in 2007/8) but they cannot be fought with interest rates alone. It takes a combination of government regulation, legal reform and government spending adjustments to bring bubbles under control before they infect the entire economy (which they will always inevitably do if left to fester).

By the way, calling people out for trying to stop the 1926-29 boom is a bit like blaming firefighters for fires getting out of control. The real mistakes were made after the bubble burst.

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

#98

Post by emodendroket »

peeters wrote: post #73
dzdt wrote: post #66

Earlier quoted context omitted.

In the US, the most standard "fixed rate" mortgage has the rate fixed for 30 years. A mortgage where the rate changes before loan maturity would be called an "adjustable rate mortgage" ("arm" for short).

Aren't we only talking about a difference in term length then? i.e. it's more common for the term length to equal the amortization length in the U.S.? In Canada even the amortization/maturity can't be greater than 25 years. And terms are commonly 5 years.

We can quibble about terminology but it sounds like a system wildly different from the US one, where most people have 30-year, fixed-rate mortgages.

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

#99

Post by dblohm7 »

dmix wrote: post #43

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…

> Which is fascinating to consider that the Bank of Canada, et al, have let this happen for so long and are only reacting now...

In Canada this is because the real estate bubbles were confined to Vancouver and Toronto. Raising interest rates to cool down real estate in those two cities would have been bad for the rest of the country.

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

#100

Post by alkonaut »

dmix wrote: post #43

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…

Mortgages are still normally time based so the monthly expense of paying it off over say 30 years limits the umbers somewhat.

In Sweden we moved from interest only mortgages to 100 years as the norm. Still too long. Doesn't work well with near zero interest rates.

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