Title: The Candyman heads to Great Britain
Subtitle: Former central bank governor leaves behind a grateful housing sector.
Last week Stephen Poloz, began to settle into his new job as governor of the Bank of Canada, a post which, due to its holder’s influence on interest rates, has a greater effect on its housing sector, than almost any other. Poloz, takes over from Mark Carney, who was poached to run the Bank of England, a far larger institution, with a greater impact on global capital flows.
Carney, who began his stint as the Bank of Canada’s governor in February of 2008, leaves to almost unanimous acclaim from economists, politicians and the financial sector. His steady hand is constantly cited as a key factor in navigating the country through the financial crisis and ensuing recession.
Core to Carney’s approach, was an unspoken policy of maximizing short-term economic growth by keeping interest rates as low as possible, as long as they did not spark excessive inflation. Under Carney’s leadership, the central bank steadily cut its target for the overnight rate from 4.0 percent to just 0.25 percent, before settling it in at 1.0 percent where it has been for almost three years.
The lower rates had the effect of a good shot of candy on the Canadian economy, which maintained a surprising degree of strength throughout Carney’s reign. Since the interest that Canadians pay on their mortgages has traditionally been their largest home ownership expense, the near-zero interest rate policy has been particularly good for Canada’s housing sector.
During Carney’s reign at the Bank of Canada, average residential real estate prices here, as measured by sales via the Canadian Real Estate Association’s MLS system, spiked from the $327,000 range to close to $380,000 last month. Contrast this with the United States, which reeled from a disastrous housing crisis, for most of that time.
A sugar high?
Almost all of that increase was due to the economic stimulus supplied by increasingly lower, and then rock-bottom interest rates, provided by the Carney-led central bank, which provided the economy with a “sugar high,” that will be difficult to maintain, let alone repeat. Carney’s policies pushed rates so low, that they are now below zero in real terms (after inflation). This gave Canadians a huge incentive to borrow and spend, such that households are now at record debt levels.
Carney policies, to be fair, are no different than those of central banks the world over. The United States, Japan, Europe the UK and elsewhere have all cut their short-term policy rates to near zero. Some have gone even further by attempting to drive down long-term interest rates through massive financial asset buying programs.
Furthermore Carney Canada’s central bank has been more cautious than most. For example it has repeatedly signalled its intention to be one of the first central banks to start boosting back rates when the opportunity arises.
However the fact remains that Canada, like many countries, remains in a remarkably fragile state. With its policy rate so low five years after the last crisis began, the country has little room to manoeuvre should another one hit.
More troubling for Carney personally though, and to the Brits who hired him, thinking that they were bringing on board a saviour, is that the policy rate at his new employer, the Bank of England, is already at a historically-low 0.5 percent. That means Carney’s traditional monetary policy stance: feeding the economy low interest rate candy, is pretty much off the table.
Let’s hope that he has other tricks up his sleeve.
© 2013, 2012, 2011, 2010, 2009, 2008, 2007, 2006, 2005, 2004, 2003, 2002, 2001, 2000, 1999, 1998
Peter Diekmeyer Communications Inc.