Finance Minster feels pressure to raise interest rates

Finance Minister Jim Flaherty says Canada will face global pressure to raise interest rates in 2014, as the United States begins to step back from its policy of extraordinary economic stimulus through intervention in bond markets.
The Fed’s reduction of quantitative easing, dubbed tapering, adds to pressure from the Organization for Economic Co-operation and Development and International Monetary Fund for Canada to hike rates, Mr. Flaherty said Sunday.
“I think the pressure will be there, because the Fed in the U.S. should stop printing money, and taper off as they say,” Mr. Flaherty, referring to the dialling back of U.S. bond-buying, told CTV in an interview aired Sunday. “The OECD and the IMF have both said to Canada we ought to let our interest rates go up a bit. So there’ll be some pressure there for that to happen.” Mr. Flaherty stopped short, however, of saying what he thinks Mr. Poloz should do, with the minister’s spokeswoman saying Sunday that’s the “domain of the Bank of Canada.”
However, a November OECD report said Bank of Canada interest-rate hikes “may begin by late 2014 to avoid a buildup of inflationary pressures.” The OECD projections assumed the rate would be hiked in late 2014 and raised to 2.25 per cent – more than double its current rate – by the end of 2015.
The IMF said in October it expected Canada to consider raising rates, or a “gradual tightening” of monetary policy, in late 2014. But the IMF also said in a report a month later that the Bank of Canada “can afford to wait before starting to raise policy rates towards more normal levels,” but that policy makers must “remain vigilant against the potential risks” of keeping rates low, such as pension funds’ “increased reliance on non-traditional investment strategies.”
Monetary policy, such as interest rates and the dollar, are the Bank of Canada’s turf, not that of Mr. Flaherty, so it’s uncommon for him to comment on the subjects. Through his spokeswoman on Sunday, he declined to comment further. NDP Finance Critic Peggy Nash said it’s “disturbing” that Mr. Flaherty is wading into a subject area that’s the responsibility of Mr. Poloz.
Bank of Canada governor Stephen Poloz says he expects long-term interest rates to rise this summer as the U.S. Federal Reserve continues tapering, but he believes that would be a positive development.
Poloz said he believes that the U.S. Fed will continue to taper its bond-buying program throughout the year and that will create market pressure on bond yields.
“In the context of a firming global economy, especially the U.S., we’d expect to see some upward pressure in market interest rates, long-term rates in particular, where the quantitative easing has its primary effect,” Poloz said in an interview with Amanda Lang on CBC.
The market handled the tapering announcement well, though it put pressure on bond yields, including Canadian bond yields, Poloz said. That would lead to an increase in long-term fixed mortgage rates, though the Bank of Canada would not increase its benchmark rate.
This may create an opportunity down the road where the spread between the 5 year fixed and the 5 year variable mortgage is large enough that the variable mortgage becomes a great option for Canadians as the rise in prime rate lags behind the rise in the bond rate. Please contact me directly to discuss the pros and cons of a fixed vs. a variable rate mortgage.
Cheers
Bernie