A former chief executive of one of Canada’s biggest banks says anyone looking for evidence that monetary policy has run “too loose for too long” in this country can look no further than the housing market.
Pressure has been building on the Bank of Canada to raise its benchmark interest rate as inflation runs hot and as concerns mount over runaway home prices. But Ed Clark, a former chief executive officer of Toronto-Dominion Bank and current chair of artificial intelligence research firm Vector Institute, said the central bank is in a tough spot when it comes to adjusting monetary policy upward.
“We’ve had a tremendous fiscal response [to the COVID-19 pandemic] but we’ve also then continued to have very low interest rates. I think that’s distortive. I mean, you can just see what’s happened to housing prices – it’s incredible,” Clark said in an interview on Friday. “And it’s the same in the capital markets – you suppress spreads, so poor credits can borrow at almost the same rates as good credits.
“I think we’ve got ourselves in a dilemma that we’ve run monetary policy too loose for too long.”
Nonetheless, Clark said the Bank of Canada needs to be careful about raising rates considering the integrated nature of the global financial system and the impact it would have on our currency.
“The problem for the Bank of Canada is if it starts to run what I would call more sensible monetary policy - if it gets too far out of line, then you’re going to have the dollar go up dramatically and make our exports less competitive. So they have a much harder game to play,” he said.
“I think the Bank of Canada has been caught, and not able to do what I would do if I was running the Bank because of the big (central) banks – the [U.S. Federal Reserve] and the European Central Bank.”
As of Friday afternoon, market data indicated investors have priced in six rate hikes this year, which would bring the Bank of Canada’s benchmark rate to 1.75 per cent – and would represent a more aggressive hiking timeline compared to what’s expected from the U.S. Fed and European Central Bank.
Clark said he wants to see central banks around the world get off the “treadmill of constantly having negative real interest rates” and return policy to more normal levels, before high inflation becomes entrenched in the economy.
As for the housing market, a report released by Royal LePage on Friday doesn’t provide too much optimism for homebuyers hoping higher interest rates will cool home prices.
The brokerage said it believes rising borrowing costs won’t significantly improve housing affordability since rates are coming off such a low base.