Archives June 2022

Learn about the objective of Canada’s monetary policy and the main instruments used to implement it: the inflation-control target and the flexible exchange rate. See also how monetary policy works, how decisions are made and related explainers.

The objective

The objective of monetary policy is to preserve the value of money by keeping inflation low, stable and predictable. This allows Canadians to make spending and investment decisions with more confidence, encourages longer-term investment in Canada’s economy, and contributes to sustained job creation and greater productivity. This in turn leads to improvements in our standard of living.

Canada’s monetary policy framework consists of two key components that work together: the inflation-control target and the flexible exchange rate. This framework helps make monetary policy actions readily understandable, and enables the Bank to demonstrate its accountability to Canadians.

The inflation-control target

At the heart of Canada’s monetary policy framework is the inflation-control target, which is two per cent, the midpoint of a 1 to 3 per cent target range. First introduced in 1991, the target is set jointly by the Bank of Canada and the federal government and reviewed every five years. However, the day-to-day conduct of monetary policy is the responsibility of the Bank’s Governing Council. The inflation-control target guides the Bank’s decisions on the appropriate setting for the policy interest rate, which is aimed at maintaining a stable price environment over the medium term. The Bank announces its policy rate settings on fixed announcement dates eight times a year.

Target for the overnight rate

The target for the overnight rate, also known as the key policy interest rate, is the interest rate that the Bank expects to be used in financial markets for one-day (or “overnight”) loans between financial institutions. This key rate serves as the benchmark that banks and other financial institutions use to set interest rates for consumer loans, mortgages and other forms of lending.

Influencing short-term interest rates

To achieve the inflation target, the Bank adjusts (raises or lowers) its key policy rate. If inflation is above target, the Bank may raise the policy rate. Doing so encourages financial institutions to increase interest rates on their loans and mortgages, discouraging borrowing and spending and thereby easing the upward pressure on prices. If inflation is below target, the Bank may lower the policy rate to encourage financial institutions to, in turn, lower interest rates on their loans and mortgages and stimulate economic activity. In other words, the Bank is equally concerned about inflation rising above or falling below the target. Such an approach guards against both high inflation and persistent deflation.

Monetary policy actions take time

Monetary policy actions take time – usually between six and eight quarters – to work their way through the economy and have their full effect on inflation. For this reason, monetary policy is always forward looking and the policy rate setting is based on the Bank’s judgment of where inflation is likely to be in the future, not what it is today.

Canada’s flexible exchange rate

Canada’s flexible exchange rate, or floating dollar, permits us to pursue an independent monetary policy that is best suited to Canada’s economic circumstances and is focused on achieving the inflation target. Movements in the exchange rate also provide a “buffer,” helping our economy to absorb and adjust to external and internal shocks.

Sam Ansari Principal Mortgage Broker, Lic# M08009393 Centum Liberty Mortgages Lic# 12088

📲: 416-356-6310 ☎ /🖨: 905-881-4990 Ext:102 📬: 7191 Yonge Street Suite 505, Thornhill, ON L3T 0C4

Our Housing Market Outlook provides forward-looking analysis into Canada’s housing markets. This helps anticipate emerging trends in Canada’s new home, resale and rental housing segments and their potential impacts on affordability and other housing challenges at the national and local level.

Key highlights from the 2022 release

• We expect the growth in prices, sales levels, and housing starts to moderate from recent highs but remain elevated in 2022. Robust GDP growth, higher employment and net migration will support demand.
• In 2023 and 2024, the growth in prices will moderate with sales and starts activity remaining above long-run averages. Home ownership affordability will decline with rising mortgage rates and with the growth in prices expected to outpace income growth. Rental affordability is also set to decline from increasing rental demand and low stocks of rental housing.
• The growth in prices will likely continue to be led by markets with already low listings, including Toronto, Vancouver, Montreal and Ottawa.
• Supply constraints on construction will continue to impact major centres and especially Vancouver and Toronto, highlighting the central role of housing supply in determining affordability.
• The Prairie provinces, led by Alberta, will likely see relatively strong sales and starts levels and be stimulated by energy sector investments and higher energy and commodities prices. The growth in prices is predicted to remain below the national average reflecting more balanced supply conditions than in other regions.
• Ontario, Quebec, and British Columbia will likely see the strongest price gains in 2022. This will largely reflect tighter supply constraints than in the rest of Canada. The growth in prices in these provinces is expected to slow by the end of 2024.
• The Atlantic region will likely see continued upward pressure on housing activity and growth in prices from high inter-provincial migration. The level of home prices will remain relatively low in comparison to the overall Canadian average.

Sam Ansari
Principal Mortgage Broker,
Lic# M08009393
Centum Liberty Mortgages
Lic# 12088

📲: 416-356-6310
☎ /🖨: 905-881-4990 Ext:102

📬: 7191 Yonge Street
Suite 505, Thornhill,
ON L3T 0C4

Interest rates plummeted to record lows at the onset of the COVID-19 pandemic – but now they’re back on the rise across Canada, a trend that’s seeing a marked shift towards the private and alternative lending spaces among many borrowers.

Changes last year to stress test guidelines meant that a growing cohort of borrowers now have to qualify at higher rates than before (the higher of 5.25%, or the contract rate plus 2%) and find themselves increasingly turning to lenders that can often offer flexible solutions.

That trend is likely to continue and grow in the coming years.

“Higher interest rates mean higher qualifying rates for the stress test, so I think that will definitely factor in on people’s buying power with more restrictions on the bank side of things, it is going to open up the private space a lot more.

“The opportunity to grow in this space is going to be great for business going forward. The” A” market is changing, and you need to evolve as well, to get to that “B” space.”

At the end of May around 6.7% of Canada’s mortgage business so far in 2022 came from private lenders or credit unions, a sizeable increase over last year when those lenders made up just 3.7% of overall mortgage funding.

It’s clear that many Canadians’ eyes have been opened to the viability of private solutions, especially as lenders in that space are often able to offer quick turnarounds that sometimes aren’t available through more traditional lenders.

That’s something we’re seeing more of because of the recent rate increase and the higher stress test qualifying rate.

“We can step in and fund deals quickly to help out in the purchasing process. It’s a good short-term solution to get the purchase completed and then work towards getting back to the A space.”

That’s proven popular among borrowers, Thompson said, not least because it means they’re now able to close on a home purchase without losing a deposit, something that can happen when they can’t secure funding from their first-choice lender.

As many lenders become more conservative and ramp up their qualification criteria, Pillar is ready to help borrowers who suddenly find themselves refused a mortgage by those organizations, said Thompson – for instance, in the business-for-self (BFS) arena.

With a chronic lack of supply still a clear problem in Canada’s housing market, the importance of construction is only set to grow in the coming years – and Pillar is well placed to assist borrowers in need of construction financing, Thompson said, with that representing one of the company’s best-established niche products.

“Construction is still going strong,” he pointed out. “We’re a solution-based lender, and we’re here to help borrowers in any situation. If it’s business-for-self, if it’s a quick close, if it’s a construction, there’s plenty we can do to find the right solution.”

Interest rates are rising, and borrowers are finding it more difficult to qualify for a mortgage – not least because there’s little sign that home prices are falling dramatically across most of Canada’s regional housing markets.

Those factors mean that alternative and private lending solutions for Canadians are only set to grow in popularity, according to Thompson, and he said that brokers should recognize the strong potential for business that exists for them in the space.

ontext of the Quarterly Financial Report

The Bank of Canada is the nation’s central bank. The Bank’s mandate under the Bank of Canada Act is to promote the economic and financial welfare of Canada. Its activities and operations are undertaken in support of this mandate and not with the objective of generating revenue or profit. The Bank is committed to keeping Canadians informed about its policies, activities and operations.

This discussion has been prepared in accordance with section 131.1 of the Financial Administration Act and follows the guidance outlined in the Treasury Board of Canada’s Directive on Accounting Standards: GC 5200 Crown Corporations Quarterly Financial Report.

Bank management is responsible for the preparation of this report, which was approved by the Audit and Finance Committee of the Board of Directors on May 25, 2022.

This Quarterly Financial Report should be read in conjunction with the condensed interim financial statements included in this report and with the Bank’s Annual Report for the year ended December 31, 2021. Disclosures and information in the 2021 Annual Report apply to the current quarter unless otherwise updated in this quarterly report.

COVID‑19: What the Bank is doing

Since the beginning of the COVID‑19 pandemic, the Bank has acted in several ways to support the Canadian economy and financial system. When key financial markets became strained in March 2020, the Bank responded by introducing several programs to provide liquidity and maintain market functioning. As market functioning gradually recovered, some of these facilities and operations were either suspended, discontinued or scaled back. On April 25, 2022, the Bank ended reinvestment entirely and began quantitative tightening. Refer to the Bank’s website for the relevant press releases and market notices and more information on these measures.

The Bank’s holdings of financial assets are typically related to its role as the exclusive issuer of Canadian bank notes. However, the higher levels of financial assets in recent years result largely from activities undertaken as part of the Bank’s monetary policy and financial system functions. The Bank’s assets peaked in the first quarter of 2021 but began to decrease as market conditions improved. The Bank continued to operate in the reinvestment phase of its quantitative easing assets purchase program during the first quarter of 2022. Its total assets decreased by 3% during that time to $486,872 million as at March 31, 2022. The main driver of the decline was the maturity of loans and receivables.

Loans and receivables is composed primarily of securities purchased under resale agreements (SPRAs). SPRAs are high-quality assets acquired through the repo market, in line with the Bank’s framework for market operations and liquidity provision. The Bank substantially increased the scale of SPRAs in response to the pandemic to support the functioning of financial markets in 2020. As market conditions improved, SPRAs decreased by 34% to $15,558 million as at March 31, 2022 compared with December 31, 2021, as a result of the suspension of the program and natural maturing of the operations.

Investments decreased by 4% to $449,173 million as at March 31, 2022. This decrease was driven mainly by the following movements within the Bank’s holdings:

• Government of Canada securities, which include nominal bonds and real return bonds, decreased by $17,733 million during the quarter. This was mainly driven by Government of Canada bonds held at fair value decreasing by $16,440 million as a result of an increase to long-term bond yields. The Bank’s remaining treasury bills matured during the quarter, resulting in a decrease of $1,331 million.
• Canada Mortgage Bonds and other bonds decreased by $1,295 million during the quarter due to the maturing of provincial and corporate bonds. The provincial and corporate programs were discontinued in 2021.

Derivatives—Indemnity agreements with the Government of Canada refers to the agreements that were put in place to indemnify and allow the Bank to support the Government of Canada, provincial and corporate bond markets. Losses resulting from the sale of assets within the Government of Canada Bond Purchase Program, the Corporate Bond Purchase Program and the Provincial Bond Purchase Program are indemnified by the Government of Canada, whereas gains on disposal are remitted to the government. The $21,083 million balance represents the fair value of the derivatives associated with the net unrealized losses on these assets as at March 31, 2022. This is represented in the asset profile chart by “All other assets”. Derivatives increased by $14,689 million during the quarter due to long-term bond yields rising as the outlook for the economy improved. This has resulted in a decrease in the fair value of assets held by the Bank, which has led to an increase in unrealized losses on those same assets.

Bank notes in circulation represents approximately 23% (23% as at December 31, 2021) of the Bank’s total liabilities. The value of bank notes in circulation decreased by 2% to $112,737 million as at March 31, 2022, reflecting decreased demand as well as seasonal variations.

Deposits consists of Government of Canada deposits, deposits by members of Payments Canada and other deposits. While deposits are normally maintained at a lower level, they now represent the largest liability on the Bank’s balance sheet. This change stems from the purchase programs the Bank implemented in 2020 to support the Canadian economy and financial system. The balance declined by 3% to $336,460 million as at March 31, 2022, reflecting the tapering in previous quarters of the Bank’s extraordinary market operations.

Securities sold under repurchase agreements increased to $36,009 million as at March 31, 2022, a 1% increase compared with December 31, 2021. This liability represents the repurchase price for security repo operations and overnight reverse repo operations, undertaken to support the functioning of financial markets. Security repos provide a temporary source of Government of Canada nominal bonds and treasury bills to primary dealers to support liquidity in the securities financing market. Overnight reverse repos help to effectively implement monetary policy by injecting or withdrawing intraday liquidity, complementing the standing deposit and lending facilities.

Equity includes $5 million of authorized share capital and a $25 million statutory reserve. The Bank also holds a special reserve of $100 million to offset potential unrealized valuation losses due to changes in the fair value of the Bank’s investments that are not covered by an indemnity agreement. Equity also includes an actuarial gains reserve of $271 million as at March 31, 2022. This reserve accumulates the net actuarial gains and losses on the Bank’s post-employment defined-benefit plans that the Bank recognizes following the transition to International Financial Reporting Standards in 2010. The largest reserve held by the Bank is the investment revaluation reserve, which sits at $427 million as at March 31, 2022. It represents the net gains in the Bank’s investment in the Bank for International Settlements (BIS).

Comprehensive income decreased by 17% in the first quarter of 2022 compared with the same period in 2021. The main driver of this decline is the higher interest expense due to an increase in interest rates on deposits held by the Bank during the current quarter. Another driver is the lower returns on assets held by the Bank’s net defined-benefit plans compared with the same period in 2021.

Interest revenue depends on current market conditions, their impact on the interest-bearing assets held on the Bank’s balance sheet, and the volume and blend of these assets. The Bank’s sources of interest revenue are interest earned on its investments in Government of Canada securities, interest earned on SPRAs and interest earned on assets resulting from the large-scale asset purchases programs. In the first quarter of 2022, interest revenue increased by $74 million (or 7%) compared with the same period in 2021. This increase is driven by higher interest rates and a higher average holding of interest-yielding investments by the Bank.

Interest expense consists mainly of interest incurred on deposits held by the Bank. During the first quarter of 2022, the interest expense increased by $127 million (50%) compared with the same period in 2021. The increase was primarily the result of higher interest rates during the period ended March 31, 2022, compared with the period ended March 31, 2021.

Expenses for the first quarter were flat compared with the same period in 2021. This primarily reflects increases in staff costs and depreciation and amortization with offsetting decreases in expenditures related to other operating expenses.

• Staff costs increased by $2 million (2%) relative to the same period in 2021. Salary costs increased by $5 million (9%) as a result of new positions being filled for strategic initiatives and the annual compensation adjustment. Benefit costs associated with the Bank’s defined-benefit plans decreased by $3 million (13%), mainly because of an increase in the discount rates used for their calculation.1
• Depreciation and amortization expenses increased by $3 million (16%) relative to the same period in 2021. This increase was mainly driven by additions to intangible assets during 2021, causing depreciation to increase from $3 million to $6 million during the period.
• Other operating expenses decreased by $3 million (17%) in the first quarter of 2022 compared with the same period in 2021. This decrease was mainly driven by a decrease in expenses for third-party services.

Other comprehensive income for the first quarter of 2022 was $220 million. It consists of remeasurement gains of $228 million on the Bank’s defined-benefit plans due to increases in discount rates,2 offset by an $8 million decrease in the fair value of the Bank’s investment in the BIS.

The year 2022 represents the first year of the Bank’s 2022–24 strategic plan, Delivering on Our Promise. The Bank’s financial management framework supports strategic planning and allows for decisions on allocating resources to achieve the Bank’s objectives, mitigate risks and invest in the Bank’s people and tools in a fiscally prudent manner.3

Outside of staff costs, which represent the largest portion of the Bank’s expenditures, expenditures include the cost of enhancing systems and tools. These expenditures support operations to sustain the Bank’s resilience posture and prepare for the future. They also support the Bank’s new mandates, continuing the Bank’s digital transformation, and reducing the Bank’s risk.

The impact of the pandemic on the Bank’s expenditures is expected to continue in 2022. The Bank is monitoring the resulting effects on workplans and shifts in expenditures.

Operational highlights and changes

Significant changes in personnel, operations and programs that have occurred since December 31, 2021, includes the following.

Governing Council and Board of Directors

On February 18, 2022, the Bank announced that Deputy Governor Lawrence L. Schembri will retire from the Bank of Canada on June 17, 2022. Mr. Schembri joined the Bank in 1997 and was appointed Deputy Governor of the Bank of Canada in 2013.

Monique Mercier resigned from the Board of Directors effective May 2, 2022.

Operations and programs

On April 13, 2022, the Bank announced an increase in the overnight rate to 1%, with the Bank rate at 1¼% and the deposit rate at 1%. It has also ended reinvestment and, effective April 25, 2022, began quantitative tightening. The Bank is no longer replacing maturing Government of Canada bonds on its balance sheet. As a result, the size of the balance sheet will decline over time.

Risk analysis

The “Risk management” section of the Annual Report for the year ended December 31, 2021, outlines the Bank’s risk management framework and risk profile. It also reviews the key areas of risk— financial, operational, strategic, and environmental and climate-related. The financial risks are discussed further in the notes to the December 31, 2021, financial statements, which are included in the Annual Report. Note 4 of the condensed interim financial statements for March 31, 2022, also provides an update on these financial risks. Although the pandemic has triggered more financial risks and volatility than usual involving some of the assets the Bank holds, those identified in the Annual Report remain the key risks for the Bank.

1. 1. Benefit costs for a given period are based on the discount rate as at December 31 of the preceding year (e.g., the rate at December 31, 2021, was used to calculate the benefit expenses for 2022). Discount rates and related benefit costs share an inverse relationship: as rates decrease, benefit expenses increase (and vice versa). The discount rates used to calculate the pension benefit plans and other benefit plan expenses ranged from 1.9 to 2.7% for 2021 and from 2.6 to 3.1% for 2022. This increase will result in decreased benefit costs for 2022, all else being equal.[←]
2. 2. The net defined-benefit liabilities are measured using the discount rate in effect as at the period-end. The rate applicable to the net defined-benefit liabilities as at March 31, 2022, ranged from 3.8 to 4.1% (2.6 to 3.1% as at December 31, 2021). See Note 9 to the condensed interim financial statements for more information.[←]
3. 3. The Bank’s forecasts for its operations do not include projections of net income and financial position. Such projections would require assumptions about interest rates, which could be interpreted as a signal of future monetary policy.[←]

The Bank of Canada today increased its target for the overnight rate to 1½%, with the Bank Rate at 1¾% and the deposit rate at 1½%. The Bank is also continuing its policy of quantitative tightening (QT).

Inflation globally and in Canada continues to rise, largely driven by higher prices for energy and food. In Canada, CPI inflation reached 6.8% for the month of April – well above the Bank’s forecast – and will likely move even higher in the near term before beginning to ease. As pervasive input price pressures feed through into consumer prices, inflation continues to broaden, with core measures of inflation ranging between 3.2% and 5.1%. Almost 70% of CPI categories now show inflation above 3%. The risk of elevated inflation becoming entrenched has risen. The Bank will use its monetary policy tools to return inflation to target and keep inflation expectations well anchored.

The increase in global inflation is occurring as the global economy slows. The Russian invasion of Ukraine, China’s COVID-related lockdowns, and ongoing supply disruptions are all weighing on activity and boosting inflation. The war has increased uncertainty and is putting further upward pressure on prices for energy and agricultural commodities. This is dampening the outlook, particularly in Europe. In the United States, private domestic demand remains robust, despite the economy contracting in the first quarter of 2022. US labour market strength continues, with wage pressures intensifying. Global financial conditions have tightened and markets have been volatile.

Canadian economic activity is strong and the economy is clearly operating in excess demand. National accounts data for the first quarter of 2022 showed GDP growth of 3.1 percent, in line with the Bank’s April Monetary Policy Report (MPR) projection. Job vacancies are elevated, companies are reporting widespread labour shortages, and wage growth has been picking up and broadening across sectors. Housing market activity is moderating from exceptionally high levels. With consumer spending in Canada remaining robust and exports anticipated to strengthen, growth in the second quarter is expected to be solid.

With the economy in excess demand, and inflation persisting well above target and expected to move higher in the near term, the Governing Council continues to judge that interest rates will need to rise further. The policy interest rate remains the Bank’s primary monetary policy instrument, with quantitative tightening acting as a complementary tool. The pace of further increases in the policy rate will be guided by the Bank’s ongoing assessment of the economy and inflation, and the Governing Council is prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target.

Information note

The next scheduled date for announcing the overnight rate target is July 13, 2022. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR at the same time.

Sam Ansari

Principal Mortgage Broker

Centum Liberty Mortgages

7191 Yonge St. Suit 505

Thornhill, ON L3T 0C4

905-881-4990