Ultra-low interest rates will not last forever and Canadians should be preparing for the day when their borrowing costs eventually return to more "normal levels," says Bank of Canada Governor Mark Carney.
Carney offered that rare bit of consumer advice yesterday after releasing the bank's latest Monetary Policy Report, which predicted Canada's recession would come to a screeching halt this quarter.
While the economic recovery remains "nascent" and subject to plenty of risks, Carney stressed that "extraordinary measures" taken by policy-makers were already helping the economy get back on track.
Much of the anticipated growth is tied to the central bank's commitment to keep its key interest rate at 0.25 per cent until June 2010, provided that inflation remains tame.
When asked what guidance he'd offer Canadians on the raging "floating- versus fixed-rate" mortgage debate, Carney said it wasn't his place to offer that type of advice. Still, he did warn the days of rock-bottom interest rates would eventually end.
"There's a long way to go, but over time, things will normalize – interest rates will normalize. And the way to think about managing your personal affairs, I would submit, is can I borrow at what would be a normal rate?" Carney said.
"Because at some point down the road – and I'm not predicting when that's going to be – but if we're on track, we'll get to a point where rates are at more normal levels."
Carney also cautioned yesterday that a return to economic growth during the July-to-September quarter would not halt painful layoffs in the job market. Nonetheless, the central bank's rosier-than-expected economic forecast prompted some economists to wonder how long Carney would be able to keep the bank's key lending rate at a record low.
"On the interest rate front, Governor Carney reiterated the conditional commitment to keep rates steady until mid-2010, but warned it was not a guarantee," observed Doug Porter, deputy chief economist with BMO Capital Markets.
"Indeed, given the Bank's relatively robust growth outlook over the next four quarters, questions will increasingly build on that commitment if their call is accurate. If growth comes in even stronger, something's gotta give – rates would then be on the rise before mid-2010."
Already, improved financial conditions, firmer commodity prices and recovering consumer confidence are being factored into the impending recovery. "There is the possibility that we could get into a virtuous circle where improving confidence leads to a better economy, which leads to further improvement in confidence in financial markets," Porter said.
Bond yields, for one, soared sharply earlier this year as the market bet on a quicker-than-expected global recovery. That jump in yields led to two sizeable hikes in medium-term mortgage rates in June. For now, however, the central bank is forecasting economic growth of 1.3 per cent on an annualized basis in the third quarter – an upward revision of its earlier projection of a 1 per cent contraction for the period. That effectively means the end of the recession is imminent.
Overall, the central bank projects the Canadian economy will contract by 2.3 per cent this year, to be followed by growth of 3 per cent in 2010 and 3.5 per cent in 2011.
Inflation expectations, meanwhile, remain "well-anchored" for the medium-term, Carney said. The consumer price index is expected to decline 0.7 per cent on a year-over-year basis this quarter, but increase by 1.2 per cent during the final quarter of this year.
Real Gross Domestic Product (percentage change, annualized rate)
Average worth of the Canadian dollar against the U.S.