Enter Inflation, Stage Right

The Bank of Canada came under pressure on Friday to stop fretting about low inflation after unexpectedly sharp price gains pushed the rate above the central bank’s target, making it more likely the next move in interest rates will be higher.

Statistics Canada reported the annual inflation rate hit a 27-month high of 2.3 percent in May from 2.0 percent in April. Core inflation, which excludes some volatile items like gasoline, rose to 1.7 percent, the highest since July 2012, from 1.4 percent in April.

As recently as last week, Bank of Canada Governor Stephen Poloz had said the underlying rate of inflation, which he pegged at 1.2 percent, was so low it “leaves us vulnerable to a downside shock at any time.” —

“The low-inflation ship has sailed in Canada, and I think the Bank of Canada pretty much has to change their rhetoric as of the next meeting,” said Bank of Montreal chief economist Doug Porter.

Poloz said the central bank’s policy stance was neutral, specifying that rates could just as easily fall as they could rise, using dovish language that has kept a lid on rate hike expectations and the currency.

Still, yields on overnight index swaps show rate cut expectations have largely faded.

And even before Friday’s data economists were unanimous that the next rate would be a hike. —

“We are still of the view that any moves on rates are not likely until 2015, but certainly there is now a higher probability of hikes coming sooner rather than later,” said Royal Bank of Canada assistant chief economist Paul Ferley.

Reuters, 20 Jun 2014

21 responses to “Enter Inflation, Stage Right

  1. Future interest rates are utterly impossible to predict.

    • “According to Statistics Canada’s 2011 National Housing Survey, almost 48 per cent of “owner households” in the city of Vancouver do not have a mortgage. Nada. Nothing.
      For all of Metro Vancouver — which would include the city plus the suburbs — the percentage of mortgage-free owner households falls to 41 per cent, which is understandable, given that many of suburban homeowners are younger, first-time buyers who have had to assume mortgages.”

      So, 41% of Vancouver owners are not leveraged to the price of their homes…
      On the other hand, 59% are.

      • My bet is that the vast majority of the ‘free-and-clear’ are elderly. Folks who will be liquidating over the next several years. If anything that will put downward pressure on prices.

      • Whipmaster~kerthwhack

        Well consider this…. many people who sold their westside properties had money left over after they paid cash for their east side properties….. The market isn’t quite as levered as y’all are hoping.

      • The other guy

        Whipmaster- you seem to lump some diverse, albeit bearish, opinions together.

        The highly leveraged will be hurting if there is a correction, the rest, especially those who have held property for a decade or more, will just not win as large a jackpot as they might have hoped but still come out winning… at least within Vancouver. In other parts of the nation, things may be more grim.

        Take your strawman arguments and vitriol elsewhere. Have you nothing better to do with your life? Do you talk s**t like this to people face to face?

      • A few thoughts…

        Mortgage free owners could still be lugging around sizeable balances on their HELOCS and/or other credit lines, which they may have had to tap for various reasons (ie. to provide for DP for stay at home children trying to get into market, high end renovations, unexpected special assessments, upscale vacations, new vehicles etc…). Anecdotal evidence would suggest such numbers are both significant and rarely discussed via the usual media channels.

        Many owners with skin in the game have much of their net worth tied up in RE (as has been discussed numerous times on this blog). IMHO, just a different definition of the word leverage.

        Will this inflationary data finally draw some of that so called “cash on the sidelines” into the market (after having earned next to nothing after tax for many years)? I am seeing some signs that the MSM and RE industry talking heads are hopping onto to this story and running with it. Whatever it takes, huh?

        Mr. Poloz et al are now stuck between a rock and a hard place with a rallying loonie (what do traders know that the rest of us dont?), mediocre economic data and never ending frothiness in the world of RE (and stocks). Despite all the chatter, I fully expect TPTB to stand pat on rates when all the dust settles in the coming weeks/months. They simply have no choice in the matter. Having said this, we may see some evidence of a further tightening to mortgage rules and/or changes within the industry, but I have my doubts anything material ever takes place as those creative minds in the banking industry always seem to have a work around in place before new rules actually come into effect. ie. as CMHC retreats, the Genworths and AIG’s of the world (who are still backstopped by taxpayers) step in to pickup the slack.

        @ El Ninja: it makes no sense for free and clear elderly to “liquidate” into open market esp if they plan on passing assets onto other family members. With some careful planning, such transactions can be done tax free without ever having to hit bids in the open marketplace.

      • @bullwhip. Do you mean they will pass on their properties to their offspring? If so, offspring will be sellers of their current digs. And what about those families where the heirs are uninterested or unable to inherit a Vancouver property? In today’s age of dispersed families, this is common. Such heirs will either rent the properties out, or sell.

      • @ El Ninja: honestly, inheriting the keys to a free and clear property would be deemed to be a nice problem (if you want to look at it this way) for most regardless of whether or not they’ll actually be living in it. Those uninterested in dealing with the day to day details can simply hire a property mgr and rent out either the existing or newly inherited digs.

        This all being said, there is a segment of the senior population who have pretty much all their eggs in the RE basket, perhaps took a massive hit during the last two stock market crashes and maybe can’t afford the lifestyle they’ve come to expect when it comes time to retire. Understandably so, they should be cashing in or maybe going the reverse mortgage route.

      • Yes, but bullwhip, they still have a lot of years left to live. They won’t be bequething their properties, they’ll be selling them to fund their retirement. As you say, a lot of eggs in the RE basket. So I still see net downward price pressure from demographics.

  2. “The decisive dynamic behind the Fed’s story of success has, in my view, actually been soaring equity prices and valuations, both publicly traded and private. How so? Equity capital gains are the only asset that does not have a corresponding liability. Thus, soaring equity prices and valuations endogenously heal private sector balance sheets that have too much debt and too little equity.

    Simple example: If a homeowner has negative equity on his house, there are two ways to fix it. The bank can haircut the mortgage to “restore” equity, or the market value of the house can go up – “recover” would be the polite word – above the value of the mortgage.

    Moralists would argue for the former; enlightened macro policymakers try to engineer the latter.”


    • Real Estate Tsunami

      Simple example: If a homeowner has negative equity on his house, there are two ways to fix it. The bank can haircut the mortgage to “restore” equity, or the market value of the house can go up – “recover” would be the polite word – above the value of the mortgage.

      Moralists would argue for the former; enlightened macro policymakers try to engineer the latter.”
      My moralist barber would also argue for the haircut.

  3. Real Estate Tsunami

    “Wake me up once we hit escape velocity”.
    Said the Captain of the low-inflation ship.
    Poloz meet the iceberg.

  4. Wasn’t it Carney that encouraged ‘escape velocity’? … he also said we don’t have Dutch Disease, which turned out to be a patent Falsehood… because, sheesh, we have this disease in Canada of the worst sort…
    I’ve said it before, and will say it again, if oil prices drop, say good bye

  5. Whipmaster~kerthwhack

    Other Guy, take your lack of real estate understanding to a different forum, maybe you should try baking? If I met someone like you, whose verbosity about real estate is inversely correlated to their knowledge of the subject, then I tell them flat out …. “excuse me, but you don’t know what you’re talking about”…. lol

  6. Mark Carney: ‘New normal’ for UK interest rates is 2.5%

    <a href="http://www.bbc.com/news/business-28053045&quot;

  7. pffft! … not far away there is a place where things still are … the way they used to be … http://tinyurl.com/lfcltnp

  8. Whipmaster~kerthwhack

    Thank god it’s Funday today. It was Funday yesterday. It is Funday tomorrow…. it’s Funday everyday if you are on the correct side of the debate. And why are some people on the correct side and some are on the wrong side? Because the people on the wrong side of the debate are blind to the salient facts to draw a correct conclusion and they refuse to expand their understanding. Too bad for you.

  9. whipmaster~kerthwhack!

    Speaking of Funday!

    Funday morning,
    I’m up to the task,
    I think I’ll kick,
    a few in the ass,
    Hey, Hey, Hey,
    it’s a beautiful day!

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