Archives June 20, 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.