Wednesday, August 20, 2014

Low interest rates new normal: Poloz

SASKATOON—Canadians can expect to enjoy relatively cheap borrowing costs for some time to come—even after the economy returns to full capacity and the Bank of Canada starts hiking interest rates, bank governor Stephen Poloz said yesterday.
But the central banker doesn’t think sending that message means people will go on spending sprees.

Poloz said it likely will take until early 2016 before the economy is firing on all cylinders and inflation is back to two percent.
But even when it does, Canadians shouldn’t expect a sudden increase in interest rates to fight inflation, he told a business group in Saskatoon yesterday.
“Our economy has room to grow and when we do get home, there is a growing consensus that interest rates will still be lower than we were accustomed to in the past,” noted Poloz.
“Both because of our shifting demographics and because after such a long period at such unusually low levels, interest rates won’t need to move as much to have the same impact on the economy,” he remarked.
The statement represents a slight shift in tone for the central bank, which for years has warned households to be mindful of overextending themselves in the housing market because one day interest rates will need to start rising.
Poloz said the new normal will be lower rates than in the past and people should get used to that.
“Does that mean that they’ll go out and borrow more?” he remarked. “It could, but I really think that what we’re observing is a high level of self-responsibility through this.
“There’s all kinds of anecdotal evidence that people are choosing to buy less house than they qualify for because they don’t want to overextend themselves,” Poloz said.
“That our banks are underwriting very carefully—making sure that people can service their debt even if interest rates go up before they renew.”
The Bank of Canada has kept the overnight rate, which impacts short-term borrowing costs, at one percent since September, 2010.
Some economists speculate the bank’s overnight rate will settle in at the 2.25-2.5 percent range—more than a full point or more below pre-recession levels.
The super-low borrowing costs generally are acknowledged to have aided the economy through the 2008-09 crisis and soft recovery—stimulating borrowing and spending among Canadians and businesses.
But not without costs, including an overheated housing market and record high levels of household debt.
As well, it has been a difficult six years for savers who have realized low yields on investments, and it has made it tough for defined benefit pension plans to cover liabilities.

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